The Big Picture: The Case for Rational Optimism

A few weeks ago at our 14th Annual Investment U Conference in San Diego, I discussed and recommended a number of investment opportunities in the U.S.

Afterwards, an attendee pulled me aside and privately declared that my optimistic outlook was not just wrong but naïve.

He then recited the litany of woes broadcast daily and recycled hourly by the national media: the weak economy, high unemployment, rising energy prices, the continuing housing slump, troubles in the Eurozone, tensions in the Middle East, political gridlock in Washington, the growing national deficit and so on.

(By the time he was done, I could have sworn he said the sun was too bright and the birds were singing too loud.)

“You really need to look at The Big Picture,” he said. Indeed, let’s do that…

We all know the recent downturn was severe and the recovery has been long and slow. But the United States still has the most dynamic economy in the developed world. The best research centers, universities and companies are here. Our country still attracts more immigrants and investment capital than any other. And the industries of the future, from biotechnology to nanotechnology, are centered here.

Many people are still hurting. Yet, despite the gloomy headlines, the majority of us have it pretty darn good.

Consider that in the first half of the twentieth century, most people earned a subsistence living through long hours of backbreaking work on farms or in factories. In 1850, the average workweek was 64 hours. In 1900, it was 53. Today it is 42 hours. On the whole, Americans work less, have more purchasing power, enjoy goods and services in almost unlimited supply, and have much more leisure.

Formal discrimination against women and minorities has ended. There is mass home ownership, with central heat and air-conditioning – and endless labor saving devices: stoves, ovens, refrigerators, dishwashers, microwaves and computers. Senior citizens are cared for financially and medically, ending the fear of impoverished old age.

Quality healthcare was almost non-existent 85 years ago. In 1927, President Calvin Coolidge’s sixteen-year-old son Calvin Jr. developed a blister playing tennis without socks at the White House. It became infected. Five days later, he died. Before the advent of antibiotics, tragedies like these were routine.

Advances in medicine and technology have eliminated most of history’s plagues, including polio, smallpox, measles and rickets. There has been a stunning reduction in infectious diseases. Heart disease and stroke incidence are in decline. A new study from the Centers for Disease Control reports that overall rates of new cancer diagnosis have dropped steadily since the mid-1990s.

We complain about the rising cost of healthcare. But that’s only because we routinely live long enough to depend on it. The average American lifespan has almost doubled over the past century.

We take a lot for granted today. Light is a good example. To get an hour of artificial light from a sesame-oil lamp in Babylon in 1750 B.C. would have cost you more than fifty hours of work. The same amount of illumination from a tallow candle in the 1800s required six hours’ labor. Fifteen minutes of work was the trade off for an hour from a kerosene lamp in the 1880s. Yet for an hour of electric light today, the average American labors half a second.

Or take transportation. For millions of years, we only got somewhere by putting one foot in front of the other. Six thousand years ago, we domesticated the horse. In the 1800s, going from New York to Chicago on a stagecoach took two weeks’ time and a month’s wages. Today you can fly to virtually any major city in the world in under 24 hours and – even with oil near recent highs – for less than a thousand dollars.

And speaking of oil… How many reports have you heard about gas surging to more than $4 a gallon recently? Contrast that with how little you’ve probably heard about the price of natural gas. Four years ago, it was $13. Today it sells for $2. The average American who heats with natural gas saved about $1,000 last year.

Or take computing. In 1987, a megabyte of memory cost $5,000. The Mac II sitting on my desk – with one megabyte of memory and a running speed of 16 megahertz (which Apple described as “blindingly fast”) – cost $5,500. Today an exponentially smaller, faster and better machine costs less than a tenth as much. As for memory, you can buy a terabyte drive today for less than 60 bucks.

Scientists say human beings evolved to have a heightened sense of fear and suspicion. (Those who lived on the plains of Africa without this quality didn’t leave many descendants.) Yet by seizing on the negatives, we often miss the good things happening around us.

In their new book Abundance, technology gurus Peter Diamandis and Steven Kotler offer an alternative view:

“What does the world really look like? Turns out it’s not the nightmare most suspect. Violence is at an all-time low, personal freedom at a historic high. During the past century child mortality decreased by 90% while the average human life span increased by 100%. Food is cheaper and more plentiful than ever (groceries cost 13 times less today than in 1870). Poverty has declined more in the past 50 years than the previous 500. In fact, adjusted for inflation, incomes have tripled in the past 50 years. Even Americans living under the poverty line today have access to a telephone, toilet, television, running water, air-conditioning, and a car. Go back 150 years and the richest robber barons could have never dreamed of such wealth.

“Nor are these changes restricted to the developed world. In Africa today a Masai warrior on a cellphone has better mobile communications than the President of the United States did 25 years ago; if he’s on a smartphone with Google, he has access to more information than the President did just 15 years ago, with a feast of standard features: watch, stereo, camera, video camera, voice recorder, GPS tracker, video teleconferencing equipment, a vast library of books, films, games, music. Just 20 years ago these same goods and services would have cost over $1 million…

“Right now all information-based technologies are on exponential growth curves: They’re doubling in power for the same price every 12 to 24 months. This is why an $8 million supercomputer from two decades ago now sits in your pocket and costs less than $200. This same rate of change is also showing up in networks, sensors, cloud computing, 3-D printing, genetics, artificial intelligence, robotics and dozens more industries.”

Despite relentless media negativity – designed to attract viewers and thus advertisers – most of society’s trend lines are overwhelmingly positive.

We enjoy economic, political and religious freedoms denied to billions throughout history. All forms of pollution – with the exception of greenhouse gases – are in decline. Our culture gives us an unprecedented ability to store, exchange and improve ideas. And we benefit enormously from the ultimate renewable resource: human imagination and creativity.

Free markets deliver an enormous bounty based on specialization and exchange. Just a small example: Our forebears couldn’t conceive our typical salad bar today because they couldn’t imagine a global transportation network capable of providing green beans from Mexico, apples from Poland and cashews from Vietnam together in the same meal.

Even the world’s poorest are being pulled upward. According to the World Bank, the number of people living on less than $1 a day has more than halved since the 1950s. That still leaves billions in destitution, but according to scientist Matt Ridley, author of The Rational Optimist, at the current rate of decline the number of people in the world living in “absolute poverty” will be statistically insignificant by 2035. The spread of microfinance and cellphone technology in many developing countries, for example, are creating countless opportunities and greater prosperity.

To know how much better off you are than your distant ancestors, you have to recognize how they lived. In his essay A History of Violence, Harvard psychologist Steven Pinker writes:

“Cruelty as entertainment, human sacrifice to indulge superstition, slavery as a labor-saving device, conquest as the mission statement of government, genocide as a means of acquiring real estate, torture and mutilation as routine punishment, the death penalty for misdemeanors and differences of opinion, assassination as the mechanism of political succession, rape as the spoils of war, pogroms as outlets for frustration, homicide as the major form of conflict resolution – all were unexceptionable features of life for most of human history. But, today, they are rare to nonexistent in the West, far less common elsewhere than they used to be, and widely condemned when they are brought to light.”

Thank your lucky stars that you won the lottery simply by being born in the modern era. This is not to downplay our current challenges, including the most predictable crisis in the nation’s history: huge and growing state and federal deficits.

Yet you’ll notice that the extreme forecasts always begin with the words, “If nothing is done…”

Something will be done. Only the most hardened cynics believe that politics will ultimately trump the national interest. The solutions are not politically easy, but they exist. Simpson-Bowles and other bi-partisan commissions have already set the stage for fiscal sanity. State governors like Chris Christie and Andrew Cuomo are now tackling deeply entrenched problems, such as pension shortfalls, that threaten to destroy state budgets. It won’t happen in this election year of political polarization and heated rhetoric, but reform at the national level is coming.

I know some, like the gentlemen in San Diego, will disagree. And it’s true that we all have gaps in our knowledge, biases and blind spots. However, it would be nice if the prophets of doom conceded that as well.

The truth is most of us have it better than we could have imagined a few decades ago. Most of us live long lives, in good health and in comfortable circumstances. By almost any measure, we are living better than 99.9% of those who came before us. Yet we routinely tell pollsters that life is hard and things are getting steadily worse.

As the essayist Randall Jarrell observed:

“People who live in a Golden Age usually go around complaining how yellow everything looks.”

Carpe Diem,

Alexander Green

Share Buybacks: A Buy Signal You Can’t Ignore

There are a number of signals that bode well for price appreciation with individual stocks: growing market share, rising sales, strong earnings growth and improving margins…

But you shouldn’t overlook another excellent indicator: share buybacks.

According to Standard & Poor’s, U.S. public companies spent at least $437 billion last year buying their own shares back. That was 46% more than in 2010.

Is this a good thing? Absolutely…

Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days with the average money market fund paying five one-hundredths of 1%. And if the outlook is uncertain, a business owner doesn’t want to commit to building new facilities or taking on employees that aren’t needed. Nor is it necessarily in the best interest of shareholders to distribute this cash in the form of taxable dividends.

So buying back shares often makes good sense. Why? Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And, ultimately, that’s what drives share prices higher.

Of course, stock buybacks boost earnings per share only if they’re larger than stock issuance. Historically, that hasn’t always been the case. (Much executive compensation today comes in the form of stock options that have a dilutive effect on existing shareholders.)

But in recent quarters, the supply of shares outstanding has been shrinking. And, according to analyst Howard Silverblatt at Standard & Poor’s, during the current earnings season, 97 of the S&P 500 enjoyed a boost to earnings per share of at least 4% from repurchases alone.

More Buybacks Ahead

Expect to see more of these buyback announcements in the weeks ahead. Why? Because U.S. corporations are sitting on more than $2 trillion in cash. That’s enough to buy all of ExxonMobil (NYSE: XOM), Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM).

There are some caveats, however. Some companies announce their intention to buy back shares and then don’t follow through. If business conditions change, interest rates rise, or cash flow decreases, a repurchase program may never get completed.

The other thing to watch is the exercise of stock options, as mentioned above. If a company is only buying back enough shares to offset the dilution that occurs when executives exercise stock options, you won’t see the buyback boost earnings per share.

But, generally speaking, share repurchase programs are a decided positive. And right now, with money cheap and corporate earnings strong, buybacks are occurring at record levels. Attractive companies in the midst of major share buybacks right now include L-3 Communications (NYSE: LLL) and ConocoPhillips (NYSE: COP).

Having Your Cake and Eating it, Too…

Of course, some analysts would rather see corporate executives buying shares with their own money rather than the company’s money. And I don’t disagree…

But sometimes you can have your cake and eat it too. In a recent study, stocks that were subject to repurchases but not insider buying beat other stocks by nearly nine percentage points over four years. But stocks that were the subject of both repurchases and insider buying beat others by a whopping 29 points over four years.

Which companies have enjoyed share buybacks and insider buying recently? Two of them are Boston Scientific (NYSE: BSX) and Bank of New York Mellon (NYSE: BK).

These are the kind of companies that should handily outperform the market in the months ahead.

Good Investing,

Alexander Green

Profile of an Illegal Insider Trader: Garrett Bauer

by Insider Alert Research Team

Whether done the right way (a.k.a. the legal way) or the wrong way (i.e. the illegal way), insider trading can be quite lucrative.

When done the wrong way, it can also be quite detrimental, ending in embarrassing investigations, steep fines and significant jail time. Hardly the way a well-educated, hard-working corporate man or woman wants to go.

Take it from Garrett Bauer, a former independent day trader on Wall Street, who worked for RBC, JAG Trading and Lighthouse Financial in the past. He also made at least $32 million of personal profit off of insider trading. The illegal kind.

That money paid for a piece of real estate in Boca Raton worth $875,000 and another $6.65 million, 6,700 square foot penthouse in Manhattan’s Upper East Side. Business Insider reported last year:

“The penthouse is beyond luxurious. There are ten rooms, including a living room with 35-foot floor-to-ceiling windows, a kitchen with state of the art appliances, and a gigantic master suite. And don’t forget about the 1,320 square foot private roof deck.”

Judging by those posh results, his insider knowledge served him well. As evidenced by his pending March sentencing, however, it didn’t serve him well enough.

While the trades were extremely lucrative, they were also performed based on specialized knowledge. That in and of itself isn’t illegal, but it becomes so when investors don’t fill out the proper forms in the proper process. And Bauer deliberately did not follow the legislated procedure, knowing full well that his actions were illegal.

In his own words, on March 21, 2011, Bauer was recorded saying: “I mean, the fact is we did something wrong. So it is not like we are being convicted of doing nothing. We did something wrong here.”

And he admitted as much in a court of law nine months later, when he entered a guilty plea to the charges of insider trading, money laundering and obstruction of justice.

At the time, the prosecution recommended a prison sentence of nine to 11 years, in addition to the money and property federal authorities permanently seized. And historically speaking, Bauer doesn’t have very good chances of the judge knocking that down to something less severe.

Invited to speak at Yale by the school’s College Investment Group as a deterrent to future white collar crime, he duly warned the gathered students that judges have a tendency to rule harshly on such cases. Their purpose: to discourage further bad behavior on the part of other well-connected businessmen and women.

Though insider trading cases perhaps get the most coverage, according to the FBI database, “White-collar crimes are categorized by deceit, concealment, or violation of trust and are not dependent on the application or threat of physical force or violence. Such acts are committed by individuals and organizations to obtain money, property, or services; to avoid the payment or loss of money or services; or to secure a personal or business advantage.”

The database also states that “The number of agents investigating corporate and other securities, commodities, and investment fraud cases has increased 47 percent, from 177 in 2001 to more than 250 today. Since 2007, there have been more than 1,700 pending corporate, securities, commodities, and investment fraud cases, an increase of 37 percent since 2001.”

So apparently judicial attempts at stemming the tide by implementing harsh sentences doesn’t work nearly as well as they’d like it to. Not that it’s their fault.

While Garrett Bauer now fully recognizes that “there are catastrophic consequences” to insider trading, he also points out how “practically everybody thinks it’s not going to happen to them.”

Doubtlessly, many people do get away with their white collar schemes. And Bauer could have been one of them, considering how he started illegal insider trading back in 1994 and continued his criminal career until 2011.

That’s a sizable stretch of time to fly under the radar. Though admittedly, it probably would have gone a lot easier for him if he hadn’t been quite so good at hiding his activities…

It All Started with Matthew Kluger

When authorities arrested Garrett Bauer, they also took 50-year-old Matthew Kluger into custody, charging him with insider trading as well.

At the time, Kluger was a senior associate for Wilson Sonsini Goodrich & Rosati, where he worked on mergers and acquisitions (M&A). But before that, he had a varied career, filled with different educational pursuits and occupational focuses. In an April 6, 2011 piece, the Business Insider detailed:

“Kluger didn’t become an M&A lawyer until later in his career. The first school Kluger went to was the Kent, Connecticut-based Kent School, a private boarding school. He then went to Cornell, where he studied at the school of Hotel Administration… Later, Kluger worked as the General Manager of a Toyota dealership in California. He graduated NYU law school in 2005.”

From there, he eventually made his way to Wilson, et al, where he represented businesses in tricky cross-border transactions. Since those deals would have involved different languages and cultural traditions, they would have been complicated enough without adding in illegal aspects to the mix.

Nor was he playing around with small-time companies. His clients included well-known businesses such as CBS, Ducati, IBM, Johnson & Johnson, RiteAid and Unilever.

Not that the big names seemed to bother him at all. If anything, they probably enticed him all the more with their enormous potential for significant profits.

On April 7,2011, as the public was still finding out about the decade-plus-long dealings, Bloomberg divulged that “The scheme laid out by prosecutors began with Kluger’s passing tips about deals he worked on as an associate for major deal law firms.”

According to informed speculation over at Business Insider the day before, he already had a history of unethically passing along information from back when he was still in law school. But it seems that he had the correct connections well before then as well, considering how he initiated the fateful scheme in 1994. That was when he asked middleman Kenneth Robinson to locate people who could and would knowingly act on insider information he relayed to them.

Robinson, a mortgage broker, went on to contact Bauer, his longtime friend. And as history now blatantly shows – and Bauer now blatantly admits – Bauer jumped right on that bandwagon. In many ways, Bauer even took charge of the operations to everybody’s benefit.

Everything seemed to go smoothly for a while. From 1994 to 1997, Kluger passed along tips he garnered from Cravath Swaine & Moore LLP, the firm he was working for at the time. It all happened again from 1998 to 2001, after Kluger switched jobs and began working for Skadden Arps Slate Meagher & Flom LLP.

During those times, Kluger acted like the pro he was, making sure to never divulge information pertaining to cases he was personally working on. He didn’t even open any suspicious-seeming documents on his computer. Yet, even so, he was able to access enough information to make lots of money.

Insider Trap Laid, Set and Sprung

 Kluger might have been quite good at what he was doing, but Bauer was apparently even better.

For some unknown reason, the two men and their partner, Robinson, took a hiatus from their illicit activities for a while. Maybe it was because Kluger was so good at keeping his white collar crimes under the radar. Maybe one or more of the men had personal reasons that kept them away from it all.

Regardless, according to now-public records, the three put the brakes on the operation in 2001 and didn’t start back up again until 2005.

They should have just stopped while they were ahead, however, since that third and final round of illegal insider trading was what did them in.

At that point, Kluger was working at Wilson Sonsini Goodrich & Rosati PC in Washington. And Bauer had long since taken over the roles of paymaster and benefactor. Or so said the prosecutors in the case. They don’t appear wrong, however, considering that, of the $32 million the men made together between 2005 and 2011, Bauer held onto all but $2 million of it.

Admittedly, that’s small change compared to the money he was working with overall. Before his arrest, Bauer said he typically traded a minimum of $50 million per day. Considering that his daily maximum was usually in the $100 million range, it shouldn’t be surprising that his 2010 total was in the billions: $8 billion, to be precise.

Of that, he told Yale students, “well under” one percent was on illegally obtained information.

Following his speech, Yale Daily News summarized his story, writing that “The scheme was discovered after Bauer became more selective about which tips he used. Robinson – who had previously not generated large profits in his own personal trading account – then began acting on Kluger’s tips… and the Securities and Exchange Commission (SEC) became suspicious of the spike in profits and investigated Robinson, who subsequently turned in himself, Bauer and Kluger.”

Technically, it could be argued that Kluger and Bauer could have kept up their schemes indefinitely without ever tipping off the SEC. Either of them could have possibly messed up significantly enough to warrant government attention even if Robinson hadn’t been caught red-handed. But their previous history and even their behavior during the official investigations seriously suggest otherwise.

With the FBI breathing down his neck, Robinson not only divulged his own discretions and those of his partners, he also went so far as to wear a wire while making numerous phone calls with the two other men.

Bloomberg notes:

“Bauer, 43, told his friend [Robinson] he believed they’d sufficiently hidden their crimes by talking on disposable cell or pay phones and by using cash from small bank accounts to dole out profits of the alleged scheme.”

They even discussed literally burning money or putting it through a washing machine cycle to clear it from any incriminating fingerprints.

That’s why Kluger was confident in their ability to escape unscathed in the end. In one recorded conversation, he told Robinson, “As long as Mr. G [Bauer] keeps his mouth shut and I keep mine and you keep yours, I don’t think they’re gonna find enough of anything.”

Again, that might very well have been true. But Robinson already had talked and was still talking, which makes the question altogether moot.

Bauer told Yale students that his entire body “turned numb” when he finally recognized that his friend had ratted him out. While he has since come to terms with that betrayal, he still acknowledges the obvious: that the next several years will be difficult, also noting that the waiting period between his guilty plea and sentencing is the proverbial eye of the storm.

He’s using that window of opportunity to give talks addressing the consequences of what he did, volunteering at a soup kitchen, teaching English and math to the underprivileged and making balloon animals for children with disabilities.

Whether all of those good works will serve him well in March when the judge determines his punishment, however, is still left to be seen.

Picking High-Growth Companies: How to Find the Next Apple

Picking High-Growth Companies: How to Find the Next Apple
by Alexander Green, Investment U Chief Investment Strategist
Friday, February 17, 2012: Issue #1711

Apple’s share price exceeded $500 this week, giving it the largest market cap of any U.S. company.

Apple (Nasdaq: AAPL) so successfully sells computers, phones and other electronic gadgets that recently announced fourth-quarter profits soared 118% on a 73% increase in revenue. This is unheard of for a $475-billion company.

To put this in perspective, earnings at the companies in the S&P 500 stock index are on track to post a 6.6% year-on-year rise for the fourth quarter. Yet once Apple’s earnings are factored out, the expected fourth-quarter gain shrivels to just 2.8%. This so skews results that many Wall Street analysts are now stripping Apple from the index before weighing valuations and making forecasts.

Of course, it’s just a matter of time before Apple’s torrid growth begins to wane. It’s not possible for $500-billion companies to keep growing at the rate of $5-billion companies… or even $50-billion companies.

So the key is to search for the next Apple. But how do you find it?

Fortunately, the factors that make a great-performing stock are well known and have been intensively studied by academics and researchers. We know the key characteristics that top-performing stocks generally possess before making their parabolic moves up.

Here are just a few:

1. Double-digit sales growth. You can only grow the bottom line for so long by cutting costs. Every business needs to have healthy top-line growth before it can generate robust and sustainable long-term earnings growth. Note that sales at Apple jumped 73% last quarter.
2. At least 25% quarterly earnings growth. In an economy as weak as this one, most companies can’t meet these first two hurdles. But, again, Apple is seeing earnings growth at more than four times this rate.
3. A return on equity of 17% or more. Return on equity – an excellent measure of management’s efficiency with capital – is calculated by dividing earnings per share by book value per share. (This is one of Warren Buffett’s key metrics, too.) Note that Apple’s return on equity is a whopping 46%.
4. New products and services. Apple is the king of innovation, regularly bringing out not just new versions of products but entirely new products: iPods, iTunes, iPhones and iPads.
5. High-quality management. Never forget that every company is essentially a team of people. And just as every great sports franchise needs a highly qualified coach, so does each company require a visionary leader. Apple’s co-founder and former CEO Steve Jobs was one of the greats. Now that he’s gone, it will be interesting to see how the new management performs.
6. Institutional support. The vast majority of shares traded on the major exchanges are mutual funds, hedge funds, pension plans and endowments. You want to own the same stocks the institutions are buying. And, indeed, institutions own more than 70% of Apple’s outstanding shares.

These are some of the key criteria that companies need to meet to generate superior long-term returns for shareholders.

We may not see another company in our lifetimes that transforms the business landscape the way Apple has. But there are plenty of great innovators out there, including Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOG), Genentech, eBay (Nasdaq: EBAY), Costco (Nasdaq: COST) and Intuitive Surgical (Nasdaq: ISRG).

These companies – and others like them – are likely to be among the best-performing stocks in the years ahead.

Good Investing,

Alexander Green

The Ultimate Alternative Investment?

The Ultimate Alternative Investment?
by Alexander Green, Investment U Chief Investment Strategist
Friday, February 10, 2012: Issue #1706

Last week I spoke at an investment conference at Rancho Santana, a charming resort community on the Pacific coast of Nicaragua, near the town of San Juan del Sur.

Set on more than two miles of coastline with rolling hills and dramatic cliffs, the reserve attracts expats, investors, surfers and nature lovers from all over the world. They like the idea of owning a piece of – or at least visiting – one of the most spectacular stretches of coastal land in the world.

Some are attracted because the property is so inexpensive. It’s hard to believe you can buy a stunning home site directly on the Pacific Ocean for less than $175,000.

And it’s not just the property that’s inexpensive. One evening 14 of us rode into town to have dinner at a favorite local restaurant, Yolanda’s. The proprietor served up heaping helpings of local lobster, fresh vegetables, black beans and rice, plantains and plenty of Corona beer. When I picked up the tab, I was shocked. The cost was less than $9 a person.

Some investors here are banking on increased foreign investment and commercial development. The International Monetary Fund estimates that Nicaragua’s economic growth hit 4% last year… and is on the verge of accelerating.

Exports jumped 23% last year. Tourism is up. MSN Money ranked Nicaragua at the top of their list of “Ten Exotic Retirement Spots for 2011,” telling readers “[Now] is the time to put this country at the top of your super-cheap overseas retirement list.” CNN Money calls it “the next Costa Rica.” Indeed, Rancho Santana is just 50 miles north of the Costa Rican border.

Good things are happening locally, too. A local business leader plans to invest $300 million next door in a world-class marina, golf and spa resort called Guacalito. Due to open in Spring 2013, it’s located just 30 minutes from Rancho Santana and is already bringing increased investment and improved infrastructure to the region. And an international airport is planned for the Tola area, located less than a half hour away.

Other investors are putting money to work here for privacy reasons. They want to diversify their portfolios beyond the prying hands of angry ex-spouses or potential litigants.

But for most, it’s the sheer beauty of the place. The New York Times points out that, “The beaches are among the finest in the Americas, and among the least developed.” Gaze out from atop one of the many bluffs on this 2,700-acre reserve and you’ll see what the coast of California looked like a hundred years ago, pristine and largely undeveloped.

Residential lots are selling quickly. Over 50 homes have been built and 24 more are under construction. It’s not hard to see why. The terrain is such that home sites can capture views of the ocean, the nearby valley and lovely sunsets. Labor costs are significantly lower here. And a master association and various sub-associations exist so that owners are assured that high and consistent standards of quality are maintained.

Is oceanfront property in Nicaragua the ultimate alternative investment? That’s for you to decide. But if you’d like to learn more, feel free to visit the website or, better yet, sign up for a property tour.

The cost is $500 per person ($600 per couple) and includes all transportation, breakfast and three nights in oceanfront accommodations at Rancho Santana. This is a great trip for those wanting to come down and investigate investment, second home or retirement opportunities. (Contact Bryan McMandon.)

In the interest of full disclosure, Rancho Santana is being developed, in part, by colleagues of mine at Agora Publishing. However, I am not compensated in any way (directly or indirectly) for any sales at the development. I just think it’s a beautiful place and an interesting investment.

And whether you decide to invest or not, I know you’d enjoy the experience.

Good Investing,

Alexander Green

Warren Buffett Just Said “Buy!”

Warren Buffett Just Said “Buy!”

by Alexander Green, Investment U Chief Investment Strategist
Monday, November 21, 2011: Issue #1647

If you needed heart surgery, you’d try to find the most talented heart surgeon around.

If you were about to be subjected to a full audit by the IRS, you’d hire the most capable tax advisor you could find.

And if you needed investment advice? I hope you’re not one of them, but I know some folks who would read financial blogs by complete unknowns, take hot tips from friends and colleagues, or listen to a sales pitch from someone selling insurance or other financial products.

Big mistake. It makes a lot more sense to listen to the world’s smartest investors, instead. And one of the very best – if not the best – is Berkshire Hathaway Chairman Warren Buffett. (Ten thousand dollars invested in Berkshire Hathaway when Buffett took the helm in 1965 is worth well over $65 million today.)

And thanks to disclosures last week, we now know what Buffett has been doing during the last few months of crazy market activity. He’s been buying.

Specifically, Buffett has plowed $10.7 billion into IBM. He has increased his stake in Wells Fargo from 361.4 million shares to 352.3 million shares. He has boosted his Dollar General stake to 4.5 million shares from 1.5 million. And he has increased his holdings in insurer Torchmark to 4.2 million shares from 2.8 million.

There are a few interesting things to note here. The first is that while most investors have been either running to cash or nervously sitting on their hands lately, Buffett has been actively capitalizing on fresh opportunities. You should be doing the same.

Second, it’s worth mentioning that Buffett has generally avoided technology stocks like IBM. But upon reading not some super-secret briefing but rather the firm’s annual report, he learned that IBM enjoys an entrenched position providing technology services to major businesses.

Buffett likes companies with a “moat” like this and has famously said that his favorite holding period is “forever.” Indeed, he recently told The Washington Post that “IBM fits all my principles … it’s something we’d like to own indefinitely.”

Then there’s the price he paid for IBM. I often get emails from readers who are baffled that I sometimes recommend companies trading at or near their highs. Buffett bought IBM as it hit new highs – even as the broad market was cratering. Indeed, the stock has more than doubled since the depth of the 2008 recession.

Buffett’s response? He says the fact that IBM has doubled doesn’t bother him. Indeed, over the years he could have bought the firm at a tiny fraction of its current price. “What matters is what the company does in the future,” says Buffett.

There are a number of important lessons here:

1. As Buffett often points out, you should be greedy when other investors are fearful.

2. You shouldn’t be reluctant to modify your investment approach a bit (as Buffett has with one of his first significant forays into technology).

3. You shouldn’t fret about how much cheaper a stock was in the past if the business is sound and growing today.

And when it comes to investment advice, history shows it pays to listen to the best of the best. That’s one reason we’ve owned Berkshire Hathaway in our Oxford All-Star Portfolio for well over a decade.

Good investing,

Alexander Green

Why Things Are Looking “UUP” for the Dollar

Why Things Are Looking “UUP” for the Dollar

by Alexander Green, Investment U Chief Investment Strategist
Monday, September 19, 2011: Issue #1603

On July 28, I wrote a column recommending Market Vectors Double Short Euro ETN (NYSE: DRR) as a way to take advantage of growing problems in the Eurozone.

Since then, that ETF has jumped 7 percent. I see more upside in that fund.

However, today I’m going to recommend another way to take advantage of an oversold dollar: PowerShares DB US Dollar Index Bullish (NYSE: UUP). It’s likely to rally in the months ahead.

Here’s why…

Two weeks ago, I was in France and the U.K. on personal business. As anyone who travels to this part of the world knows, every time you change a Ben Franklin, you get back a couple of bills and a smattering of coins. The almighty dollar doesn’t go far in this part of the world.

My cab ride from Heathrow to Notting Hill cost $120. A pizza and a coke was $35. And you can forget about finding any bargains at Harrods these days.

The Top Reasons For a Weak Dollar

We all know the reasons why the dollar has been weak:

• The persistently high U.S. budget deficit,
• Huge unfunded entitlement liabilities
• And ultra-low interest rates.

Yet Europe is hardly a model of financial strength, economic growth, or fiscal propriety. What too many analysts fail to appreciate is that, in many respects, matters are worse in the Eurozone and Great Britain than they are here.

I’ve already covered the extensive problems and lack of viable solutions in the Eurozone. But take a look at Britain.

Two weeks ago, the Bank of International Settlements reported that – following a 10-year binge under the last Labour government – debt in the U.K. grew faster than in any other country. It now amounts to $284,000 per household.

The near doubling of government, corporate and household debt in Britain over the last decade was the biggest increase of any Western economy. And the Bank of International Settlements reports that this debt is further set to “explode” in the years ahead.

This is no small problem. In 2010, Britain had government debt of nearly 90 percent of GDP, corporate debt of 126 percent and household debt of 106 percent. Of the G7 economies, only Britain and Canada are in the danger zone for all three types of debt.

Why Now is Time to Be Long the Dollar

So the question remains. Why the heck should the pound sterling be so strong against the dollar? I’m not arguing that the United States is doing everything right. Clearly, it isn’t.

But there are good reasons to believe that America is in better shape than our friends across the pond.

Where, for instance, is the grassroots movement in Europe – like our Tea Party – that’s crying out for fiscal responsibility and limited government? Our politicians are at least getting the message that a large bloc of voters won’t accept out-of-control spending from either party anymore.

This looks like the inflection point for a higher dollar. Take advantage of it with UUP. PowerShares DB US Dollar Index Bullish is designed to replicate the performance of being long the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

It’s almost a shame that the Swiss franc – a genuine reflection of fiscal responsibility – is included in the group. On the other hand, the Swiss are sick and tired of their surging currency and are intervening heavily in currency markets to stem its rise.

In short, this is a good time to be long the dollar. And UUP is a great way to play it.

Good investing,

Alexander Green

Why the Sun is Setting on Gold

Why the Sun is Setting on Gold

by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, February 22, 2011

Six weeks ago, I wrote a column advising short-term speculators to sell their gold.

Since that time, the metal has drifted lower. But the brunt of the decline is likely still ahead.

As I’ve said before, gold is difficult to value under the best of circumstances. It pays no interest, has no earnings, provides no rent. What gold will be worth next week or next month is whatever buyers will pay for it at the time. And that, in technical terms, is a guess.

I’ve heard gold bugs make their case. Some are based on emotion. Others are based on political fantasies about the Federal Reserve turning us into the Weimar Republic circa 1923, or modern-day Zimbabwe.

What I rarely hear them talking about is pedestrian stuff like supply and demand…

When Buyers Become Sellers, Look Out Below

Billions of dollars have been spent building gold mines over the last few years, so it’s not inconceivable that supply could begin to outstrip demand.

Of course, demand itself is fickle.

In 2005, investors made up just 16% of total demand for gold. Today, it’s more than 40%. Gold ETFs have taken in more than $50 billion since 2004.

What will happen to the price of gold when these buyers become net sellers, as many will when it becomes clear that the party is over? Paulson & Co., a hedge fund, now holds more than $4 billion in the SPDR Gold Trust ETF (NYSE: GLD). I wouldn’t want to be standing in front of his eventual liquidation. And, like most hedge fund managers, Paulson is not a “buy-and-hold” investor.

Some bulls justify buying gold at these levels because it briefly traded at more than $800 an ounce in 1980. And they say if you simply adjust for inflation, gold should be trading at $2,300 today.

That’s weak. Here’s why…

Don’t Be Blinded by the Gold Light

Gold badly underperformed inflation – not to mention stocks, bonds, real estate and burying your money in a hole – for 20 years after 1980. Why is it suddenly destined to catch up now?

Or look at it another way: On August 25, 1999, gold traded at $252.55 an ounce. Adjusting for inflation, gold should be trading at $339.65 an ounce today.

Granted, my starting point is the 30-year-low. But then, a calculation based on the 1980 high is just as arbitrary.

It’s understandable that gold spiked during the 2007-2009 financial crisis. Gold is an excellent barometer of investor anxiety. But that crisis is over. The recession – defined as two straight quarters of negative GDP growth – ended in June 2009. And inflation is running at just 1.2%.

So why is gold still in the stratosphere?

What to Do With Your Gold Holdings Now

Yes, I know the price of food, gasoline, health care and college tuition are all going up much faster than the official inflation rate. But let’s also concede that the price of cars, computers, appliances, electronics, furniture and, not insignificantly, homes – the biggest asset most consumers will ever buy – is coming decidedly down.

Experienced investors know that after an asset has made a huge run, the little guy – forever a day late and a dollar short – starts clamoring for a piece of the action. At that point, the bloom is off the rose. It’s too late to buy and generally high time to sell.

Take my old neighbors, Sam and Brian. They lost their shirts in Internet stocks in 2000-2002. Now they’re stuck with huge negative equity in Florida condos that they bought pre-construction – a “no-brainer” in 2005.

So what are they doing with their rapidly vanishing capital today?

You guessed it. Now that gold is up five-fold in the last 10 years and three-fold in the last five years, they’re convinced that a big move lies just ahead.

Maybe. But what’s certain is that one lies just behind.

My advice? Keep your gold bullion and blue-chip mining stocks that you own as an inflation-hedge or part of your long-term asset allocation.

But if you’re counting on gold to dash higher, note that the last time investors bought into a gold mania it took more than 25 years for them to break even – not counting inflation.

As Mark Twain famously said, “History may not repeat itself. But it rhymes.”

Good investing,

Alexander Green