Economic Survival in the 21st Century - the Three Key Questions to askWritten by Henry To, CFA
In this “special report”, I want to pose a few important “philosophical questions” to my readers. Firstly -- our Federal Reserve Chairman, Alan Greenspan, addressed effects and implications of our aging population on things such as Social Security again in a speech that he made last Friday. Readers may remember that I also briefly mentioned this issue in my June 24th commentary. I urge you to keep this worldwide phenomenon of aging population firmly on back of your minds. If you are like most people, then you earn you living by producing a certain thing – such as a consumer good, or a service that masses want. Let’s face it – how many people really “struck it rich” by being pure traders or investment managers? The stock market and other financial markets are definitely very important to us investors/traders but this “super secular trend” of aging of worldwide population will impact every aspect of our lives, whether it is losing our relative competitiveness on world arena, increasing pension and healthcare costs, or even a potential fundamental change of our political system.The second question that I want my readers to think about is potential end to era of cheap energy prices – an era which we have basically enjoyed for last two decades without thinking of long-term repercussions. The United States, with less than five percent of world’s population, currently consume approximately 25% of world’s energy each year. Supply is maturing while demand continues to surge – as exemplified by surging in demand from China and India. In meantime, spare energy-producing capacity and inventory levels have been at all-time lows – potential for a perfect storm? Finally, I want to ask my readers following question: What kind of investor are you? What investing style do you adopt and what investing style are you most comfortable with? Can you be a contrarian and buy when crowd is selling or are you merely a follower who is only comfortable if you fit in? These are straightforward questions – but these are questions that you really need to ask yourselves in order to truly make money in investing over long run. If my readers take time out to thinking about these three questions or issues – and ultimately have a firm grasp of even just one of issues – then you will be in a much better economic situation than most Americans five to ten years from now. To begin, what are potential implications of “aging population” phenomenon? Readers my recall that in my June 24th commentary, I stated: “Assuming that current level of benefits remain into future and assuming level of taxes is not raised, then public benefits to retirees would dramatically increase going forward. On extreme end, Japan and Spain will see a more than 100% increase in their outlays to retirees. Clearly, this is not sustainable. Either things such as defense or education spending will need to be cut, or above countries will need to raise their taxes. Neither of two scenarios is optimal. Borrowing more of their funds is not a long-term solution. Cutting funding in defense and education will comprise a country’s future, and raising taxes will place a huge social and financial burden on population of developed world – where taxes are already at a historically high level. Think about this: If you were a bright, young, French industrialist and you were forced to pay 60% of your income as taxes to support elderly, what would you do? Why, you would vote with your feet and relocate to another country that is more tax-friendly and business-friendly – and so will other great talent that may have been a great contribution to French economy. The governments of developed world recognize this – but there are no easy solutions.” “This picture gets grimmer when one takes note of a study that was done by Bank Credit Analyst. In that study, BCA predicts that by year 2050, percentage share of developed countries of global population will drop from over 30% in 1950 to less than 14% -- or about equal to population of Islamic nations of world. Similarly, Yemen will be more populous than Germany in 2050; while Iraq will be 30% more populous than Italy (Iraq is less than 40% size of Italy today). Russia’s population is projected to continue to decrease – at a rate such that population of Iran will be even higher to that of Russia’s in 2050. India will be most populous nation in world, and Pakistan will only lag U.S. by approximately 50 million people. If developed countries of today do not choose to work harder or become more efficient, then they will ultimately lose their comparative advantage, as younger population of world is inherently more hard-working, energetic, innovative, and creative. In today’s globalized world, this will be a killer for average worker in developed countries – more so once language barrier is eliminated (the successful commercialization of universal language translators is projected to happen in ten to fifteen years). I am generally more optimistic, as elimination of language barrier will greatly enhance business opportunities and efficiencies, but a person such as average American worker will loss his or her comparative advantage in global workforce. The availability of a huge supply of labor should also drive down wages in global marketplace – and most probably increase maldistribution of wealth in today’s developed countries.” Like I have mentioned before, there are no easy solutions. If average American sees an increase of 10 years in his or her life expectancy, can he or she reasonably or logically retire at current normal retirement age of 65 (which was determined during Roosevelt administration during 1930s) without placing an undue burden on system? The answer is most probably “no.” Applying same working-years-to-retirement-years ratio to his or her new life expectancy, then average American should probably work around five to six years more – thus giving a revised normal retirement age of 70 or so. Moreover, all this analysis is based on outdated population distribution in form of a pyramid – where younger and more able workers represent a majority of population (and where elderly represents only a small minority of general population). The pyramid distribution has historically facilitated government support of elderly – as monetary and social burdens have been shouldered by a relatively large younger population. The current experience of Europe and Japan suggests a more uniform distribution in population of those countries going forward – as birthrate in those countries are now dismally below replacement rate of population. The situation in United States is not currently as drastic (given our relatively lax immigration policy) but we are heading towards same direction. Thus to maintain current standard of living at retirement, my guess is that general population will not only have to work longer, but work longer hours in present (and save more) as well.
| | How to create wealth in the stock marketWritten by Charles M. O'Melia
How to create wealth in stock marketFirst and foremost, an opportunistic strategy for creating wealth in stock market is needed. And opportunistic strategy for creating wealth in stock market must have two ingredients, a plan and a goal. The plan must be a definite, concrete plan of investing that would profit you and your family for rest of your lives. This opportunistic investment plan you begin should not profit anyone else – not a stockbroker, a mutual fund or a financial advisor. This means you have to have confidence in yourself and in your own judgment as to whether investment plan you begin has merit. And this means that investment plan would and should have already been proven to you! This definite, concrete plan you begin for creating wealth through opportunities in stock market must also have a goal. The goal should be clear and specific, and once your have made up your mind to achieve that goal, then go forward and make that goal a reality. What are opportunistic traits of a strategic investment plan built on concrete that would actually allow shareholder to profit through all turmoil of an up and down stock market? The secret for creating wealth in stock market; no matter what direction market is heading? As in what appears to be most difficult investment question of all to answer, answer lies in simplicity itself – investing in those companies that have a historical record of raising their dividend every year. Whether or not you can take this statement of fact to heart is your own judgment call. But it is this opportunistic trait that can and will create wealth for you and your family for rest of your lives. A company’s ability to raise its dividend every year, coupled with stock appreciation is a very powerful wealth creating formula! I’m going to provide you with two examples, though there are many more, some with even better results. The two examples are from my book, soon to be published by American Book Publishing – The Stockopoly Plan (where an investment plan and a goal are written in stone). The first example would be a stock purchased in 1990, Comerica (CMA). What led to purchase of CMA? – In 1990 CMA had a 21 year history of raising their dividend every year. Today’s CMA has a 35 year history of raising their dividend every year. This opportunistic trait in CMA stock has garnished a little better than a 15 percent return a year, compounded annually (just by having dividends reinvested back into stock each quarter through those years – I prove this to you in The Stockopoly Plan), for past 14 plus years. Today’s CMA stock just recently touched a new high at $60 dollars a share, with a dividend yield of around 3˝ percent. In April of 2003 stock was selling around $37.50 a share, paying a dividend yield of around 5% a year. Am I tempted to sell my position in CMA? Do I care if stock drops from this lofty price back to $37 a share? Why should I? If stock drops back to $37 a share, my dividends being reinvested back into stock each quarter purchases more shares, and my dividend income from CMA simply and dramatically accelerates. I am also already prepared that if a buy-out offer is ever made for company to reap profits of owning stock (as well as possibility of another stock split).
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