The Best Investment You Can Make In Four Minutes

by Alexander Green, Investment U Chief Investment Strategist
Monday, February 6, 2012: Issue #1702

What if you could reach total financial independence in just four minutes a day?

If that sounds unrealistic, stay tuned. Because in the weeks ahead, our panel of experts at Investment U is going to show you exactly how it’s done.  Best of all, it won’t cost you a dime. After all, this service is free.

It’s a shame, really, that the average person graduates from high school and still doesn’t truly understand compound interest, or adjustable-rate mortgages or what a 401(k) is. Far fewer still know how to navigate the world’s treacherous but lucrative financial markets.

Since financial literacy and advanced money management skills aren’t taught in school, many men and women follow a predictable path when it comes to investing.

First, realizing they don’t know enough to risk their saving without potentially making huge mistakes, they turn to a stockbroker, insurance agent or mutual fund salesman for advice.

Not good.  Many people in the financial industry are peddling advice that is pedestrian, self-serving, far too expensive or all three.  Expect to hear these folks tell you, for example, that full-load mutual funds, whole life insurance and high-cost variable annuities are the best things since night baseball.

After a few years, the typical customer realizes that he’s dealing not with a fiduciary but a salesman – and a primary reason he’s not doing well is that his broker is doing too well.

That’s when many investors make their next predictable move. They transfer their account to a discount broker like E-Trade or Charles Schwab.

And while a discounter is a whole lot cheaper than a full-service broker, it quickly becomes apparent that the customer isn’t a professional money manager himself and – truth be told – really doesn’t know that much about what he’s doing.

The typical discount customer ends up with a few winners and a few losers, but doesn’t know when to sell them or why. At the end of the year, he looks at his statement and sees he isn’t much closer to his financial goals – if, indeed, he ever took the time to set any.

This brings many investors (older, wiser and generally poorer) to the conclusion that they do need qualified help, just not from a salesman in a transaction-based relationship.

Eventually, hundreds of thousands of investors turn to Investment U, the free, Web-based source for men and women seeking to achieve and maintain total financial freedom.

Proven Principles Don’t Change

We do something virtually no one else does. Investment U provides daily commentary and analysis about today’s fast-moving financial markets, but always with the objective of tying our advice to timeless investment principles.

Economies expand and contract. Currencies rise and fall. Governments come and go. Markets zig and zag. But proven investment principles don’t change.

Yet the sad fact is that most investors have never learned them. They’re trying to ace Trigonometry without having mastered Algebra 1. Why don’t you have the crucial knowledge you need?  Because schools don’t teach it and telling the unvarnished truth isn’t conducive to selling high-priced financial products.

As Vanguard founder John Bogle likes to say, “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

We don’t have conflicts like that here. We don’t charge commissions or fees. We don’t want to “capture your assets.”

Yes, Investment U offers premium services to subscribers. (We couldn’t support a free e-letter forever if we didn’t.) But there is never any obligation to buy and any purchase comes with a free-trial period and a money-back guarantee.

So stick with us. In the weeks ahead, we are going to reveal big dividend plays, high-yield bonds, undervalued currencies, ultra-cheap commodities, risk-reduction techniques, and proven strategies to prevent losses, protect gains and navigate today’s volatile investment environment.

Best of all, we’re going to do all this with a single goal in mind: To show you the shortest, most direct route to total financial independence.

The only commitment it requires from you is four minutes a day. That’s how long it takes the average reader to finish our daily column.

The service is free. But the knowledge is priceless.

Good Investing,

Alexander Green

Investing in Alternative Assets

Investing in Alternative Assets

by Alexander Green, Investment U Chief Investment Strategist
Friday, February 3, 2012: Issue #1701

Rarely have Americans faced a more challenging investment landscape.

Bonds yield next to nothing. Money markets pay literally nothing. Residential real estate is swamped in a flood of short sales and foreclosures. Gold – after climbing six-fold over the last 12 years – may have topped out. And stocks are gyrating madly.

Given all this, where does the prudent investor put his money to work?

That’s what I asked Rick Pfeifer, an Oxford Club Pillar One Advisor and Senior Portfolio Manager with Fund Advisors of America, a Maitland, Florida-based money management firm, in a recent interview:

Q: Rick, the typical investor is disgusted with the yields on bonds and cash and scared to death of the stock market. What are you saying to clients?

A: I’m telling them that now is an excellent time to take a portion of their portfolio and diversify into alternative assets: convertible bonds, preferred shares, foreign currencies, hedge positions, ultra-cheap commodities and so on.

Q: Okay, let’s take these one at a time. What are you buying now and why?

A: We recently launched a managed account for individual investors that we call The Global Hedge Portfolio. The idea is not to replace your traditional stock and bond portfolio, but to offer a complement to it. We’re seeking profits in investments that don’t move in lockstep with either the S&P 500 or Lehman’s Treasury Index.

Q: Give me a couple of “for-instances.”

A: Take the situation in the Eurozone, for example. We see European leaders and the European Central bank doing a whole lot of talking, but we don’t see genuine, concrete steps toward solving the huge fiscal problems in Southern Europe. Some might even argue that the reason they haven’t yet taken serious corrective steps is because their options are so limited. Italy, for example, is simply too big an economy to bail out, in my view. My co-strategist Greg Galloway and I forecast that the euro will fall to parity with the dollar within 12 months. So we are short the euro in our Global Hedge Portfolio.

Q: Can’t fault your thinking there. I’ve been saying much the same thing for months now. What else are you doing?

A: We’re investing in overlooked asset classes with plenty of upside potential. Take timber, for example. Over the long run, investments in timber have beaten stocks by about 4% annually – and with considerably less volatility. Plus, timber is uncorrelated to stocks, making it an excellent way to balance your portfolio. One timber trust we own is seeing revenue grow 23% annually. Operating margins top 24%. And we’re getting a 3.5% dividend yield, too.

Q: What else are you buying?

A: We’re finding bargains in certain international markets, particularly Asia and Latin America. Because domestic demand there is growing, these areas are largely immune to problems here at home and in the Eurozone. For example, we’re buying an Asian auto manufacturer that’s selling for just half of annual sales. It’s trading at a substantial discount to book and should easily triple its earnings this year. We’re also picking up undervalued oil assets in Brazil, high-yielding energy trusts in Canada, a high-quality wine maker in Chile and the world’s leading food company, denominated in Swiss francs.

Q: How about metals?

A: We’re not buying commodities directly. Instead, we’re buying metal producers that appear undervalued and have big dividends attached.

Q: What about gold?

A: I don’t know what gold is going to do and I don’t think anyone else knows, either. But some gold producers are selling at mouth-watering prices right now, even if gold goes nowhere. One of our favorites yields 10% right now. If gold takes off, great. But if it moves sideways for a while, a 10% yield makes it a comfortable wait.

Q: What if gold moves south?

A: We run trailing stops on our investment positions. That gives us unlimited upside potential with strictly limited downside risk.

Q: Anything else you really like?

A: Quite a few things, really. I’ll mention one. Residential real estate is a mess, not only in the United States but in many overseas markets, as well. But we’re finding real bargains in commercial real estate in select overseas markets. Of course, we’re not buying the buildings themselves. Our investments are totally liquid. And, in addition to potential share price appreciation here, some of the assets are currently yielding more than 7%.

Q: Good to know, Rick. And an excellent reminder that for investors who are willing to invest worldwide, there are always opportunities available somewhere. Thanks for sharing your thoughts with us today, Rick.

A: Any time. It’s my pleasure.

Good Investing,

Alexander Green

An Investor’s Assessment of Brazil

An Investor’s Assessment of Brazil

by New Frontier Trader Research Team

About a decade ago, Jim O’Neill, then the Managing Director of Goldman Sach’s Investment Management Division, first used the acronym “BRIC” for Brazil, Russia, India and China in a report entitled “Building Better Global Economic BRICS.”

In that report, he noted that by the end of 2000, “GDP in US$ on a PPP basis in Brazil, Russia, India and China (BRIC) was about 23.3% of world GDP. On a current GDP basis, BRIC share of [the] world is 8%.”

He then went on to predict that those emerging markets would outperform the western world in terms of real GDP growth. But that was only the short-term picture, he claimed. “Over the next 10 years, the weight of the BRICs… will grow, raising important issues about the global economic impact of fiscal and monetary policy in the BRICs.”

And boy, but was he right.

China, especially, can now influence western markets simply by faltering… or even the hint that it might falter sometime somehow in the future. It can even be argued that Europe and the U.S. – or at least their stock markets – are beginning to base their security on China, especially considering the massive amount of U.S. debt China owns and how much it is now scooping up in Europe.

And while they don’t make the news nearly as often, Brazil, Russia and India are all making and changing history too these days, sometimes in good ways and sometimes by far less desirable means, such as Russia’s uncomfortably close ties to Iran or China’s open support of North Korea.

But regardless of their methods, it’s hard to deny that all four are growing in influence, even if some of that growth seems slow and painful at times, especially in countries like India. While India, with its massive population and growing opportunities for business – thanks to a little Western invention called outsourcing – has a lot going for it, the country has allowed numerous internal factors to bog it down for the time being.

Up until last year, few investors had any such doubts about Brazil, however. Outside opinion pegged that country as headed nowhere but up ever since it emerged from the global recession a few years back. Its annual GDP growth might not have been as impressive as China’s – which is partially due to carefully crafted government smokescreens anyway – but it was still moving at a steady clip all the same.

Notably, the Latin American nation was quick to exit the 2008-2009 recession that dragged so much of the global economy down. It only suffered two quarters of negative growth before bouncing back. And in 2010, GDP grew by an impressive 7.5%, sparking Brazilian fever in investors worldwide.

But Brazil ran into some trouble last year, provoking instant negativity from countless analysts who were suddenly all too ready to throw it to the dogs. For better or worse, it calmed down the hype enough so that investors could more easily step back and analyze the country through realistic lenses.

For those that did, they probably quickly came to the conclusion that Brazil is just like any other investment area: No matter how hard anybody tries to paint it as perfect, it’s not by any means a sure thing and shouldn’t be treated as such.

A Quick Low Down on Brazil

Any way you look at it, Brazil is a big country.

The CIA’s World Factbook puts it 8,514,877 sq km, which makes it just “slightly smaller than the US” and definitely the largest nation in Latin America. On a global scale, it measures up quite nicely as well, with only Russia, Canada, the U.S. and China ranking higher in sheer size.

The giant holds up financially as well, surpassing the United Kingdom last year as the sixth-largest economy in the world. And it has a population of 195 million people, many of whom are rising from poverty for the first time and therefore eager to spend.

But Brazil has more going for it than sheer size. As Rolls Royce’s South American President Francisco Itzaina put it earlier this year, “God blessed Brazil with huge amounts of natural resources… Brazil is very well placed for the future.”

That’s an easy conclusion to come to considering the country’s long list of commodities it has to offer and enjoy. It’s easily number one in coffee production and sugarcane – accounting for nearly a third in the former and half in the latter – and exports significant amounts of beef, poultry, soybeans and corn.

And that’s not all by far. Published on SeekingAlpha.com, Armine Bouchentouf describes Brazil as being “endowed with massive natural resources” that also cover the energy and mining industries. As of late last year, Brazil had control of “an estimated 12 billion barrels of oil and… [held] the second-largest reserves in Latin America, right behind Venezuela.”

Far more recently, BBC News business reporter Will Smale wrote that, “With substantial oil and gas reserves continuing to be discovered off Brazil’s coast in recent years, the country is now the world’s ninth largest oil producer, and the government wishes to ultimately enter the top five.”

Naturally, that has countries around the world courting it heavily. China has invested heavily into Brazil’s infrastructure and commodities businesses already, and it just beat the U.S. out on obtaining even more offshore crude. President Obama even went so far as to personally travel down to the Latin American BRIC to put in an offer for the oil, offering loans and incentives to extract the hot commodity in an “environmentally responsible manner.”

Judging by Brazil’s ultimate decision, China one-upped America in the bidding war. But the larger story just goes to show how valuable the South American nation really is on a global scale.

Concerning its mining capabilities, commodities analysts expect Brazil to produce 772 million tons of iron ore and 662,000 tons of copper by 2015.

It also features a solid amount of gold. In 2010, it produced around 61 tons but that number is expected to climb to 94 in three years’ time as both private and government-owned companies pour money into the mining industry in general.

With many Latin American and Asian economies growing rapidly, all of that output translates into easy cash. North America, Europe and Japan still need their fair share of materials and food of course, but that burden has been drastically increased over the past few years as new consumer classes emerge in previously unexpected areas of the world.

Unless something exceedingly drastic changes locally or in the global economy, Brazil shouldn’t have any trouble trying to offload its commodities in the coming years. But even if it inexplicably does, it won’t suffer nearly as badly as its fellow BRIC country, China.

No matter how far it’s progressed, the Chinese economy still has far too much tied into its international trade. But while exports contribute about 40% of GDP in the Asian nation, in Brazil, that number falls significantly to 13% or 14%. And that’s a much more manageable number in the kind of troublesome global economy like the world has seen for the past few years.

Not Quite the Golden Goose It Seemed but Still Worth a Gander

All of that impressive economic data doesn’t make Brazil any kind of investment holy grail, however. Like every other country – established, emerging or other – it has its problems. And those problems made themselves known particularly well last year.

Trouble first really started rearing its head in June 2011, when economic activity fell into negative territory for the first time since December 2008. Not surprisingly, industrial production and business confidence tanked right with it.

The very next month, job growth came in lower than 10 out of 10 Bloomberg economists predicted. All of that combined to present a far less optimistic – though hardly negative – picture of Brazil’s future profitability. And by the end of August, most economists had revised their original opinions on the nation, cutting their expectations for end-of-the-year GDP results three times in three weeks down to 3.84%.

Brazil was beginning to look like a one-trick pony after its impressive 7.5% growth the previous year.

A lot of factors went into that decline, including a rapid rise in inflation, which hurt consumers across the country and significantly bit into domestic spending. And falling commodities prices didn’t help either.

Between May and September 2011, oil especially was trending downward, much to the delight of vehicle owners everywhere but not so much for anybody with money in the industry, including entire countries like Brazil. Meanwhile, gold experienced several significant setbacks along the way as well.

Finance Minister Guido Mantega added that intentional government attempts to slow things down in order to maintain sustainable growth and a more natural cooling period following the mad rush out of the recession contributed as well.

All of that led noteworthy investment analyst Martin Hutchinson to conclude that Brazil might not be the safest place to park your money. Admittedly, he wasn’t thrilled with Russia, India or China either, and he had better things to say about Brazil than some of the others, but he still offered these words of caution:

“Brazil has been run by big-spending socialists since 2002 and has been immensely lucky to benefit from the commodities boom. Now the boom has topped out (probably temporarily) but its government is still overspending and has begun to harass foreign investors. Brazil is in big trouble if commodities prices fall.”

Forbes contributor Kenneth Rapoza agreed. Sort of.

He admitted that Brazil’s economy was slowing down significantly from its 2010 activity. And late last year, he fully predicted that kind of weak growth to continue through the entire fourth quarter before falling even further in the early months of 2012. But he also expects the economy to come bouncing back after that… enough to capture an extremely decent 5% growth for this full year.

If he’s correct, that makes it a worthwhile stop for investment money. But with the global economy as uncertain as it is, Brazil is still something of a gamble in both the short-term and the longer run.

Even with most of its economic growth generated internally, the Eurozone financial crisis can still adversely affect Brazil in more than just how much it exports. If investors panic over Greek debt and IMF bailout plans, they’re probably going to panic over everything, including commodities. And there’s no way to know just how far they’ll press prices down if and when they’re forced to confront just how bad the situation in Europe really is.

Even if everything goes perfectly well, investors need to understand smaller issues still holding onto the once-third world nation, which can easily affect individual businesses.

Taxes, for one thing, are higher than they should be, eating into existing business’ profits and putting a damper on any non-government sanctioned entrepreneurial attempts. Weak infrastructure doesn’t help either, causing backlogs and traffic jams enough to frustrate both individual citizens and businesses alike. And corruption and crime still dominate many sections of the country straight up into the political ranks.

Not that political corruption isn’t anything that the West doesn’t have to deal with on a regular basis as well. But it can make things even more difficult in an emerging market that still has so many other issues to deal with as well.

A final significant issue that plagues Brazil comes down to a combination of protectionism and poverty. While its middle class is rising rapidly, that growth doesn’t seem enough to sustain its growing needs as consumers.

For example, the UK’s Guardian reported last year that “Brazil trains less than 40,000 engineering graduates and architects a year, whereas industry and construction need 60,000.” And that’s true of other sectors that depend heavily on skilled workers as well.

Brazil could probably easily fill at least some of that gap by reaching out to foreigners, but that simply doesn’t seem to be in its nature as evidenced by its population status, which includes barely a handful of legal immigrants at all, much less skilled ones.

The country currently seems much more into remaining “pure” than advancing itself, which is, of course, its prerogative and doubtlessly has its benefits. But when it comes to short and mid-term economic health, Brazil only seems to be hampering itself in this regard.

In the end, what investors can conclude from all this information is that Brazil is a great place to invest… just with caution.

Healthcare: The Hottest Stock Market Sector in 2012

Healthcare: The Hottest Stock Market Sector in 2012

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 30, 2012: Issue #1696

Too many investors are focused on high unemployment, weak economic growth, problems in the Eurozone and runaway deficit spending. They seldom note the positives, including low inflation, rock-bottom interest rates, falling food and energy prices (coal and natural gas), expanding opportunities in emerging markets, low valuations and – not least of all – all-time record corporate profits.

So don’t let the doomsayers get you down. There are always opportunities out there, even during the most difficult economic times.

The Healthcare Sector in 2012

In particular, I see the planets aligning for medical technology right now. Why? Baby Boomers are moving into their golden years (and will soon need more healthcare services). Product innovation is continuing apace. Hospitals and clinics are busy upgrading their technology to cut costs, increase safety and minimize errors. And the healthcare sector is less sensitive to the vagaries of the business cycle.

Let me use just one example from my Oxford Trading Portfolio: Cerner Corp. (Nasdaq: CERN).

Cerner makes systems that automate records in hospitals and doctors’ offices. This is much more efficient than handwritten notes. It’s also much safer.

Automation reduces errors. Doctors – famous for illegible handwriting – can cause the wrong drug to be inadvertently dispensed at a hospital or pharmacy. They can forget to renew old prescriptions. Cerner prevents that.

The company is also a leader in billing software, with a much wider range of offerings than any of its competitors. For example, its scalable Millennium software is already installed in more than 9,000 hospitals, pharmacies and doctors’ offices. And a new federal push for records automation will only increase that footprint.

Paper records can be easily lost, stolen, misplaced, or destroyed in a fire. That doesn’t benefit the doctor or the insurance company – and certainly not the patient.

The whole world is going digital and the healthcare sector has lagged behind for too long. Digital medical records are safer, better organized, more accessible and less susceptible to human error. Whenever I see an opportunity this big, I know huge profits are just around the corner.

$4-Trillion Influx

Cerner is just one of many healthcare stocks that promise huge capital gains in the weeks and months ahead. And my colleague Marc Lichtenfeld, Editor of FirstLine Investor Alert, has uncovered dozens more.

FirstLine aims to profit from the $4 trillion that’s going to flood the healthcare sector over the coming years. Thanks to nearly four million Baby Boomers turning 65 every year, companies involved in biotech, genomics, regenerative medicine, medical technology and personalized medicine will soon experience explosive growth.

In a recent chat with Marc, he told me about four companies in particular that have huge upside potential right now.

The first is a firm poised to take advantage of the frenzy in the hepatitis C space. Investors have seen buyout premiums of 89% and 163% in the past two months. Plus, in April, the company is expected to have the first drug approved that addresses the cause of a very serious disease, rather than just the symptoms.

The second is an emerging leader in regenerative medicine. In early clinical trials, its treatments produce dramatic improvements in patients with chronic heart disease. If approved, this procedure would both save both lives and millions of healthcare dollars.

The third is a small firm with a drug that nearly doubles the survival of patients with an aggressive cancer, with few side effects.

The last – and potentially the biggest opportunity – is a company that reads the DNA of cancer tumors. This helps doctors determine the proper course of treatment, allowing the patient to avoid chemotherapy.

Look Beyond Negative Headlines

I can’t emphasize strongly enough how important it is for investors today to look beyond all the negative political and economic headlines and focus on companies that are set to knock the ball out of the park for shareholders.

When Willie Sutton was asked why he robbed banks, he answered simply, “Because that’s where the money is.” For the very same reason, you should invest in the fastest growing companies in the healthcare sector today.

Good Investing,

Alexander Green

Does Low Volatility Put Your Portfolio At Risk?

Does Low Volatility Put Your Portfolio At Risk?

by Alexander Green, Investment U Chief Investment Strategist
Friday, January 27, 2012: Issue #1695

The stock market gyrated so wildly in 2011 that many investors finally threw in the towel.

How else can we read the massive equity fund redemptions that occurred in the second half of last year?

But, apparently, the market has taken its anti-anxiety medication. After last year’s gut-wrenching swings, U.S. stocks have been surprisingly tranquil. For 13 straight days, the Dow has moved up or down less than 100 points.

This is good news for bullish traders and bad news for those who have been making money trading the VIX. Let me explain…

The VIX is the ticker symbol for the CBOE Market Volatility Index, a popular measure of volatility in S&P 500 index options. According to The Wall Street Journal, this so-called “fear gauge” has fallen 20% to levels unseen in six months.

Why? One reason is that the U.S. economy appears to be getting back on its feet. Despite all the pessimism in the Eurozone, U.S. corporations are busy reporting yet another quarter of all-time record profits. (Just how long will mom-and-pop investors ignore this salient point?)

The Dow is up almost 500 points for the month. Fund companies report that money is flowing back into equities again. Yet the calm makes some investors nervous. I hear many analysts crying out that the market is about to plunge again.

Deluded, Ignorant, or Both

Let’s start with the straightforward declaration that anyone who claims to know “what the market is going to do next” is, by definition, someone who is ignorant, deluded, or both. The market will rise or fall next week or next month based on next week’s or next month’s news. Yesterday’s news has already been discounted. (As Legg Mason’s Bill Miller likes to say, “If it’s in the papers, in the price.)

Moreover, there’s no historical evidence to show that a market pause generally precedes a correction. And the data go back pretty far.

For example, market analyst Mark Hulbert has loaded the Dow’s daily returns – all the way back to its creation in 1896 – into his statistical software. For each trade date since, he calculated the Dow’s trailing volatility and then looked to see if the stock market performed any different following periods of low volatility than it did at all other times.

The short answer? Nope. He came up empty. Perhaps that’s the reason for the old Wall Street saw: “Never sell a dull market short.”

There are two things to conclude here:

• The hair-raising volatility that made trading (going long) the VIX like taking a tootsie roll from a toddler is over, at least for now…
• The other important takeaway is that traders and investors have no historical reason to believe that the recent pause portends a market downturn ahead.

Sure, a spike in oil prices, a hedge fund blow-up or a nasty surprise from across the pond could change that in a nanosecond. But bolts out of the blue are just one of the many short-term hazards of trading and investing.

For now, the market is taking a breather. But that doesn’t mean it isn’t about to get a second wind.

Good Investing,

Alexander Green

Emerging Markets Present Significant Investor Opportunities

Emerging Markets Present Significant Investor Opportunities

by New Frontier Trader Research Team

Between July 6, 2009 and November 30, 2009, Alex Green’s New Frontier Trader service made 82.57% on Buenos Aires’ Banco Macro.

It made 61.97% on China’s 51job between August 17, 2010 and November 10, 2011.

And between January 1, 2011 and June 6, 2011, it booked 17.48% on Buenos Aires’ MercadoLibre.

As evidenced by those examples, there’s money to be made in the less traditional areas of the investing world known as emerging markets.

Emerging markets are countries with economies that are still in the process of moving from a third world status into a first. And as such, they have great potential for growth… typically much more so than the usual places to invest, such as the United States and Europe.

Traditionally speaking, after all, the U.S. economy – a well-established nation with significant global influence – grows at a mere 2 or 3% per year. China, on the other hand, for all of its human rights violations, continuing communism and exceedingly poor underclass, claims anywhere from 8-10% per year.

That’s a significant difference by any measure.

When a country’s GDP grows, it usually does so because its citizens and their businesses are growing. People spend more, invest more, and demand more, encouraging the economy to expand in order to properly suit their needs.

For example, the Latin American emerging market of Brazil has always had potential in investors’ books. With its impressive land size, expanding population and abundant amount of commodities, it holds untold fortunes. The only problem was that it couldn’t seem to live up to everything outsiders were sure it could be.

For decades, its problems were numerous and obvious: a poor economy and poor citizens coping in the middle of a largely uncertain political terrain marked by corruption, dictatorship and warring factions.

In 1994, that all started to change though. The ruling government came together with businesses to act in the best interest of the country instead of itself, setting Brazil on an enriching path of prosperity and growth.

As emerging markets researcher, Tony Daltorio, explained for Investment U, by 2009, it had succeeded in “lowering inflation to a reasonable level, reducing net debt to an enviable 40% of GDP, paying off all [of its] IMF loans, aggressively boosting foreign reserves to $200 billion, and achieving a ‘cherished’ investment grade rating for its sovereign debt.”

Similarly, from 2001 to 2007, the country’s impoverished saw their income increase nearly 50%. By 2010, over 30 million people of Brazil’s 190 million had successfully risen out of poverty, moving into the ranks of the consumers where they could benefit and take advantage of:

• Airlines like Gol Linhas Aereas Inteligentes (NYSE: GOL) and Tam ADR (TAM)
• Telecommunication companies such as Tele Norte Leste (NYSE: TNE) and TIM Participacoes (NYSE: TSU)
• Banking services like Banco Itau (NYSE: ITUB) and Banco Bradesco (NYSE: BBD)

Naturally, the more business Brazil’s emerging middle class gives those businesses, the more profitable they become (or should become, if they’re doing it at all right) and the more attractive they become to investors.

… Hence the appeal of up and coming economies: They have more room to grow and therefore oftentimes more profits to offer.

The Downside of Investing in Emerging Markets

That all isn’t to say that there isn’t a downside to investing in emerging markets. Because there is. And it can be a big one.

Just like they have a bigger potential for sizable profits, they also carry a more substantial risk of significant losses.

Between changing governments trying to figure out what works and what doesn’t, businesses figuring out for the first time how to deal with larger clientele bases – or just clients at all! – and consumers experiencing the heady rush of getting to choose their likes and dislikes instead of having to settle for the barest minimum, the investment climate can all too easily become scary.

There is also often lingering corruption from the old order, unfamiliar customs and preferences, and dicey means of transportation for businesses to rely on. And not every country can rise above all of those obstacles or, even when they do, it can take years and even decades to do so.

There is no guarantee an emerging market or the businesses it houses will automatically do well.

For every Brazil out there, there’s at least one Russia, if not more. And for all of the positive whispering going on about the former Soviet Union right now, investors should consider just how many outside companies fled the country – or got kicked out! – after they tried their luck there.

Only a few years back, Russia was a significantly sized destination for intrepid investors to park their cash. Big businesses in Europe especially saw the potential of over 141 million citizens in a country that seemed to be shrugging off its communist past.

One of the more prominent businesses that misread the political climate was British Petrol (NYSE: BP). In 2003, then-CEO John Browne flew from England to Moscow to kick-start TNK-BP, a joint venture with the state controlled Rosneft to profit off of the country’s noteworthy amount of oil.

Russia had the resources and BP had the ability to get at them. It seemed like a win-win for everybody! That is except for Mikhail Khodorkovsky, essentially Rosneft’s boss until he fell foul of then-Russian President Vladimir Putin and got thrown into jail for it… conveniently allowing Putin to take over the company.

For the good of Mother Russia, of course.

With that kind of track record, it was no wonder then that just five years later, Bob Dudley, who was the boss of TNK-BP at the time, had to literally flee the country due to “sustained harassment” from the local government.

Admittedly, that didn’t stop the combined business from continuing to do well. As of 2010, TNK-BP even made up a full eighth of BP’s profits. But only a well-established big business with a main product as necessary as oil can thrive under those kinds of conditions.

And even so, BP got lucky. Individual investors putting their money into individual Russian stocks have significantly less chances of getting out intact.

Problem is, it’s not just Russia. The same holds for China with its still largely government controlled businesses, India with its continuing caste system that holds so much of the country back, South Korea with its problematic northerly neighbor constantly keeping it on its toes, and so many other investing hot spots.

Even the highly ballyhooed Brazil isn’t above criticism.

As Minyanville notes, “2011 was a rough year for emerging markets across the board as investors pulled cash out of these volatile economies and loaded up on bonds and ultra-safe US blue chip stocks instead.”

Argue all you want that the established economies in Europe and the U.S. didn’t exactly do well in 2011 either. But it won’t do much good.

If for no other reason than misplaced perception, emerging markets spook investors just as much if not more than they excite them.

When it comes down to it, investing in general can be dangerous. But investing in unknown elements in countries that still have a decent way down the road to a stable and profitable democracy can be even more so.

Diversify Your Portfolio with Some Emerging Market Goodies

With that caution aside, investing in emerging markets still isn’t a bad idea. In fact, it’s actually recommended to put a portion of your portfolio into those countries, just as long as you take special precautions.

One way to do that is to let somebody else like Alexander Green do the work for you. In his New Frontier Trader, Alex does the research into specific countries and companies for you and emails his conclusions. (To find out more about the New Frontier Trader, click here.)

Of course, there are still no guarantees. There usually aren’t any in life. But Alex has 20+ years experience as a research analyst, investment advisor, financial writer and portfolio manager, which can go a long way.

If you don’t want to shell out the money for his time, however, there are plenty of Exchange Traded Funds (ETFs) that focus solely on emerging markets.

These conservative plays act as single stocks but actually profit off of multiple companies at once. Investors can choose ETFs that invest in only China, Brazil, India, etc. Or they can further diversify by buying up ones that hold companies across Asia, Latin America or Africa.

This can cut down on potential profits – if one particular company does very well, investors don’t make the same kind of money somebody with direct shares would – but it also protects against possible losses in the same way.

Or, for those investors who can afford a little extra risk, plenty of great companies have been springing up around the world in the last few years. Many of them are even listed on U.S. exchanges, which usually is a pretty decent indicator that they’re less likely to crash and burn.

Though, with that said, it’s still just as important to properly research them with the same diligence necessary for any other company.

Emerging market stocks can easily become an important part of any portfolio. Just don’t make the mistake of thinking every single one of them is going up just because it’s in a country that sounds good.

The Great Minds of the Market: Charles Dow

The Great Minds of the Market: Charles Dow

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 23, 2012: Issue #1692

This week I’m beginning a series about the great men and women – often unknown – who shaped the modern investment landscape.

Why should you care about these individuals, especially since many of them are dead? Because Sir Francis Bacon was right: Knowledge is power. This is especially true in the financial markets. And, as you’re about to learn, the type of knowledge you accumulate is likely to be a primary determinant of your success as an investor.

So let’s kick things off today with a man whose name is legendary on Wall Street:

Charles Dow.

Dow is a significant figure in the annals of financial history for two reasons. He created the first financial bible, The Wall Street Journal, and the first market barometer, the Dow Jones Industrial Average. In doing so, he revolutionized the way we talk about the financial markets.

(By the way, Charles Dow is sometimes credited with creating Dow Theory, too. This is not so. The market-timing strategy was extracted fom his WSJ editorials 20 years after his death by a market technician named William P. Hamilton.)

Charles Dow founded Dow Jones and Company with a partner in New York in 1882. At the time, most financial data was simply outdated news and unreliable gossip. But Dow Jones and Company published daily financial updates in a two-page newspaper called the Customers’ Afternoon Letter – The Wall Street Journal’s predecessor.

It was in the Letter that Dow first published his average, initially comprised of 14 companies – 12 railroads and two industrials.

Today the Dow consists of 30 large companies meant to reflect the U.S. economy. (There are, however, few holdings in heavy industry – and no railroads!) The average, price-weighted to compensate for stock splits and other adjustments, is the most closely watched benchmark for tracking stock market activity.

Yet the Dow is actually a poor representation of the broad market. If you’re looking to capture its performance, you’re much better off owning the better-diversified S&P 500 (NYSE: SPY) or the Wilshire 5000 (NYSE: TMW).

The most important thing we can learn from Charles Dow is the primacy of financial information. More than a hundred years ago, he realized that it was essential for investors to have not just opinions, rumors and forecasts, but verifiable facts. You simply must be well informed and up-to-date beyond this week’s headlines.

I’ve known investors who will buy a stock and not keep abreast of how the company is performing relative to its competitors, the direction of sales, or even the growth in profits. This is an act of faith, not rational investing.

Charles Dow created a daily business publication to give investors essential facts. Today, of course, you can get your financial news in real time off the internet. But the important data isn’t today’s government statistics or a new pronouncement by Ben Bernanke, but rather the hard numbers that tell us how individual businesses are performing.

The kind of investment news you accumulate is crucial. Listen to economic analysts, for example, and you’ll hear gloom and doom about high unemployment, the housing slump, consumer confidence, or problems in the Eurozone.

Listen to market analysts and you’ll hear trivia about short-term trends, changes in volume, support and resistance levels, and so on. This is not the type of information that will not make you rich.

But listen to business analysts today and you’ll hear plenty about corporate innovations, new medicines and technologies, and, not incidentally, all-time record corporate profits.

Is it any great surprise that investors who follow business news are making a lot of money in this market and those who listen to economic and market forecasts are sitting on their hands and earning miniscule returns?

Charles Dow knew better. And you should, too.

Good Investing,

Alexander Green

Why Most of the Investment Advice You’ve Heard is Wrong

Why Most of the Investment Advice You’ve Heard is Wrong

by Alexander Green, Investment U Chief Investment Strategist
Friday, January 20, 2012: Issue #1691

A conversation with a friend last week sounded numbingly familiar.

“I just can’t seem to win for losing in the stock market,” he confessed. “Five years ago, my broker had me fully invested in stocks and I took a drubbing. Then when things were bottoming out a couple years later, he talked me into making my portfolio more conservative. As a result, I didn’t get much of a pop on the rebound. Now he’s trying to get me to reshuffle again. But I’m too scared to do anything.”

Since he was a friend, I felt obliged to tell him the truth: He’s getting lousy investment advice. Not because his broker failed to outguess the market… but because he’s guessing at all. As if that wasn’t bad enough, there’s a good chance that the advice he’s getting is tainted by self-interest.

Here’s what I mean…

It still astonishes me that the vast majority of investors – even ones who have been active for decades – still don’t understand that stock market success has nothing to do with figuring out the economy.

Look back at history. There’s no correlation between economic growth and stock market performance from year to year. Equities routinely plunge during the good times and rally during the bad. If you know this – and truly understand it – why would you invest your money based on someone’s economic forecast?

The same is true of market timing. It’s easy to look in the rearview mirror and see when you should have been in the market and when you should have been out. But when you look ahead, it is always a blank slate. No guru or trading system can change that.

Even if you could somehow divine what the stock market was going to do next – which you can’t – you still wouldn’t know which stocks would outperform and which ones would lag.

The only way to determine that is to look at business fundamentals. Companies that are doing all the right things – increasing sales, compounding earnings at high rates, growing market share, improving operating margins, paying down debt, buying back shares – will post superb returns, regardless of what the economy or stock market are doing. And those that are doing the opposite – experiencing flat or negative sales, lackluster earnings growth, small margins, high interest costs and diluting existing shareholders with new stock issues – will be laggards.

In short, stock market success is about analyzing businesses not investing in some self-styled expert’s macroeconomic forecast. Yet that’s exactly what the mass media and much of the investment advisory industry encourages people to do every day.

The media does it to attract viewers – and thus advertisers. The advisory industry does it sometimes out of ignorance but often just to justify its fees. This is especially true when you have a transaction-based relationship with an advisor where the more you trade the better he or she is compensated. Trust me. That doesn’t generate satisfactory long-term returns.

Every time you hear a pundit talk about “the new normal,” the rally just ahead or the prolonged economic slump we’re likely to endure, understand that you’re listening to opinions that are no more helpful than a weather forecast for three weeks from Sunday.

Both pieces of advice are worthless. But one is a lot more expensive – and harmful – than the other.

Good Investing,

Alexander Green

Is Your Investment Advisor Capitalizing on Your Fear?

Is Your Investment Advisor Capitalizing on Your Fear?

by Alexander Green, Investment U Chief Investment Strategist

Monday, January 16, 2012: Issue #1687

Make no mistake. Investors are petrified right now. And they’re telling their investment advisors about it.

The question is: “What is he or she doing in response?” If the answer is adjusting your asset allocation, focusing on your long-term investment goals, or doing a bit of handholding, you probably have a good one.

But if they’re preying on your emotional state with unsuitable investments or all-or-nothing advice, beware.

The story is as old as equity investing itself. When times are good, investors get complacent, take too much risk and generally regret it. When times are bad, investors become anxiety-ridden, take too little risk and generally regret it. Seasoned advisors know this and try to keep you on the right track. But less knowledgeable or less scrupulous advisors may try to take advantage of your worries.

For instance, your investment advisor may recommend that you load up on variable annuities in this uncertain environment. Not a good idea. Some annuities are right for some people. They offer tax-deferred compounding (like an IRA) and a principal guarantee. But the typical annuity is ridiculously expensive, offers mediocre insurance coverage, restricts your investment choices to so-so mutual funds, lacks liquidity and comes with enormous surrender penalties.

Too many investors learn these things about annuities after they’ve plunked for one. Hence, you’ll often hear investors complain that they are “stuck in an annuity” for several years. Investigate these insurance contracts before you invest. On the whole they are oversold, frequently misrepresented and completely inappropriate for many folks.

Another sign that you have a misguided (or unethical) investment advisor is if he suggests that you abandon proven investment principles. For example, if your investment plan is based on a broker’s economic forecast or market timing advice, good luck. You’re going to need it.

No one can accurately predict the economy with any consistency. And it wouldn’t really matter if they could. Stocks routinely rally during the bad times and sell-off during the good ones. If your investment advisor doesn’t know this, you shouldn’t be using her. If she does and is still trying to convince you to flee the market, that’s even worse.

Also beware investment advisors who are paid on a transaction basis and therefore have an incentive for you to trade more frequently. Some brokers today are telling their clients that the old rules no longer apply, that you need to jump in and out of the market and from stock to stock. For a commission-based broker, this can be entirely self-serving advice. And it is almost certain to end badly… at least for the client.

I know it’s tough to buy – or just hang in there – when the outlook is dark. But look back at history. The market was a screaming “Buy” after the crash of ’87, the bear market of 1990, the tech wreck of 1994, the Asian Contagion of 1997, the 2000 to 2002 bear market, and even during the depths of the financial crisis in 2008.

If you’re using an advisor who insists that “this time it’s different,” you might reasonably examine his experience, his ethics and his disciplinary history. And seek out more-qualified advice.

Good Investing,

Alexander Green

Why the Gold Slump is Not Over

Why the Gold Slump is Not Over

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 09, 2012: Issue #1682

Not long ago, my colleague Mark Skousen asked a roomful of attendees at an investment conference how many of them owned gold. Virtually every hand in the room went up.

“And how many of you have ever sold any of your gold?”

Virtually every hand in the room came down.

For many investors, gold is their “forever investment,” the one asset they never plan to sell. That could be a mistake, a big one.

I can assure you that the institutional investors who have bid gold up the last few years consider the metal a “hot date,” not a long-term marriage. And that bodes ill for prices in the short to medium term.

Yes, I was bearish on gold a year ago. But I’m more bearish on it today. After all, the trend is your friend.

True, gold went up in the first half of 2011 and didn’t peak until August. But take a look at a five-month chart.

It’s not a pretty picture.

Of course, gold is hard to value under the best of circumstances. It has very few industrial uses. It generates no earnings, pays no dividends, accrues no interest and provides no rental income. That means the best any of us can do is guess where it’s headed next.

So why am I guessing it will be lower? Let me count the ways:

1. Gold is a wonderful inflation hedge. But the metal is up more than five-fold over the last 12 years and inflation is still not a problem. Is it not conceivable that inflation could tick up and gold – having already discounted this – moves lower?

2. Gold is a great performer in an economic crisis. But we already had the crisis. It ended in 2008. Things are getting slowly better, not worse.

3. With gold prices still in the stratosphere and the value of the rupee falling, India – the world’s biggest consumer of gold – is likely to experience a pronounced drop-off in demand this year. Not good.

4. Gold is now well above the marginal cost of production. New mines are opening and old mines are re-opening. It’s Economics 101. Greater supply depresses prices.

5. If you believe the gargantuan debt load that Washington has run up will cause gold to rally from here, you may want to think again. Japan’s debt load as a percentage of GDP is more than twice ours and the end result has been disinflation, not inflation. Why will it be different this time? Indeed, George Soros and several other major speculators are openly forecasting outright deflation. That would not be good for gold.

6. Note that while gold ended the year up in 2011, gold shares dropped 16%. Already, equity investors are taking a dim view of the sustainability of gold’s advance. I think they’re right.

7. Investment demand for gold has soared in recent years. Seven years ago, it made up just 16% of total demand. Today it’s more than 40%. But hedge fund managers who piled into gold, unlike Mom and Pop, have no emotional commitment to the metal. These are hair-trigger traders. When the primary trend turns unequivocally south, you can bet these guys will dump gold faster than a freshman girlfriend.

I’m not suggesting that anyone bail out of gold. You should hold at least 5% of your liquid assets in gold and gold stocks, and perhaps more. But if you’re one of those folks I meet who has 30%, 50% … even 80% in the barbarous relic, you’re really sitting at the roulette table at 3 AM.

No one can say unequivocally that the bet won’t pay off. But there could be a steep price to pay if it doesn’t. The last time gold was a bubble, investors were down more than 60% two decades later.

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

Good Investing,

Alexander Green