If you have my proclivities as an investor and you like the rules I mentioned last Wednesday in “What I’m Doing With My Money Now (Part One),” then you may want to consider the following…
My Current Positions/Decisions
For the last few years, I’ve been accumulating cash.
Not because I think cash is all that great. It’s more a question of some other moves I’ve been making – selling off certain assets and banking the cash until new opportunities come along.
With real estate, for example, I’ve been selling lots of smaller properties (like single-family houses, condos and small commercial buildings) and trying to replace them with larger properties (apartment and business complexes). The goal is to simplify my portfolio so that it’s easier for son No. 2 to manage it and hopefully get a slightly better average yield from it by consolidating management and maintenance expenses.
I’ve been doing a similar thing with my art collection: selling the less valuable pieces (through Ford Fine Art, a business I started 10 years ago), keeping the really good (museum grade) pieces, buying a few good ones and holding the rest as cash.
My portfolio of municipal bonds, which was once about $10 million, is less than half that now. And it’s getting smaller. I’m not doing anything fancy. I’m just cashing in those that are due. If I could buy new AAA-rated, guaranteed munis at the 5% to 6.5% yield I got when I used to buy them, I would. But I can’t, and I’m not willing at this time to invest in riskier bonds. So that portfolio is also converting to cash.
With banks giving me less than 0.5% on my cash savings, I’m not thrilled about having lots of money sitting in the bank, making them money. I’d rather have much of it in safe-as-the-bank investments that give me a decent rate of return. I have found some opportunities, which I’ll tell you about in a moment, but they are not that easy to find. So for now, I’m sitting on a fair amount of cash.
However, there is an obvious advantage to having cash: When some market corrects and suddenly some really good investment opportunities arise, you’ll have the cash to buy them. You won’t be wiped out as so many millions are every time the stock market or the real estate market takes a dive.
The last time my cash account swelled like this was from 2006 to 2009. This happened because I had stopped buying real estate and municipal bonds (the two primary assets I was buying at the time). I stopped buying real estate because I couldn’t find properties at reasonable prices. I stopped buying municipal bonds because the yields had dropped so low that they were barely keeping up with inflation.
So my cash account got big – about 10% of my total portfolio. But then, by 2009, prices for the properties I liked at the time (single-family, three-bedroom, two-bath houses) were quite cheap. Some of them were selling at 70% discounts from their highs.
Because I had all that cash, I could tell my real estate partners, “Go out there and buy everything you can.”
2. Bonds and Other Debt Instruments
I like investing in debt and would still be investing in municipal bonds if they were yielding at least 5%. But since the returns are so paltry now, I’m selling those I have as they mature. And my goal is to use that cash to buy some other sort of debt instrument.
For example, I’ve done a fair amount of private lending recently – bridge loans and longer-term collateralized loans to friends, family members and colleagues. I’m earning in the range of 6% to 8% on my money, which nets to about 4% to 6% after taxes. I’ve also been looking now and then at the tax lien market where returns are higher – but it takes more time to research and manage.
I explained my rules for stock investing last week. The stocks I own are all big, dominant (and mostly dividend-paying) companies I’m confident will be big and dominant and income-producing long after I’m gone.
That’s why I don’t sell when the market turns down. I look for buying opportunities.
And so when the stock market dropped nearly 9% between January 26, 2018, and February 9, 2018, I was looking to buy. And several of the stocks in my “Legacy Portfolio” came into a range that my broker Dominick and I felt were attractive, including American Express (NYSE: AXP), IBM (NYSE: IBM), Chevron Corporation (NYSE: CVX) and Proctor & Gamble (NYSE: PG).
Just to be clear, my goal with these stocks is to buy and then wait until their share values increase before selling. My goal is to gradually increase my shareholdings. The more stock I own, the richer I feel.
I could do this by automatically reinvesting the dividends or increasing my holding of each stock every year by 2% or 3%. But I prefer to cash out all the dividends and then, when buying opportunities arise, put that cash into just a portion of the stocks – the ones that have the best prices relative to earnings.
I also started a second portfolio (Legacy Plus) that is very much like the Legacy Portfolio, except that it tilts more toward high tech.
I did this not because I favor high-tech stocks. I don’t. But it doesn’t take a genius to see that the best of them are the bedrock of our economy’s future wealth. I selected the stocks using the same strict guidelines: The companies needed firmly held positions in their markets, great fundamentals and high barriers of entry.
4. Stock Options
I’ve temporarily stopped trading options, and I’m trying to decide whether I will start again.
My options strategy was extremely conservative: I sold puts on the big, safe companies in my Legacy Portfolio. This strategy aligned nicely with my general preference in making wealth-building decisions. I’m looking for sure and steady income. Assuming I have a choice between two equally safe investments, I’ll pick the one that gives me more income.
The short-term rates of return I got by trading my Legacy stocks were very encouraging: 8% to 15%. But the actual cash flow I was getting out of my account was less than that. It was more like 6% to 7%, which isn’t terrible considering how safe this strategy was. But it was a bit of work. And since it was traded regularly, it was taxable as ordinary income.
I’m confident I’ll get at least the historic average of 9% to 10% on my Legacy stocks. So unless I can get comfortable selling puts on smaller, somewhat riskier stocks, or unless the market itself becomes more volatile (in a good way), offering me the chance to make more than 9% to 10%, I’m leaving options to others who have more time and risk tolerance.
5. Gold, Silver, Platinum
I do not consider gold (or silver or platinum) to be an investment because it’s not. It’s an asset that produces no income. Its value, like cash and even digital currency, is based on the value people put on it.
Yet I own gold. I bought a bunch of bullion (and a few rare) coins about 15 or so years ago when gold was trading at about $450. I did not buy it to double my money (although that’s what happened). Rather, I wanted to insure myself against the possibility that the U.S. economy might one day collapse, as some of my colleagues were predicting.
The theory is this: If things do go to hell in a handbasket, you’ll want to have a stash of gold coins that you can use to get you and your family to a safe place and then support them.
If we have a true worldwide economic collapse, I am not at all sure that gold will have any value. But maybe it will, so I have some.
Actually, I have way more than I probably would ever need. At around 4% of my net investible wealth, my gold cup runneth over. With respect to the possibility of financial Armageddon, I’m overinsured.
So my plan has been to sell some of it, a little bit every month until my stash feels like the right size. But I haven’t gotten around to it yet because I already have a lot of cash and I’m thinking gold may not be better than cash, but it’s probably not worse either.
[Next Wednesday our offices will be closed for Independence Day. Tune in Wednesday, July 11 for the third and final installment of “What I’m Doing With My Money Now (Part Three).”]