Registered Investment Advisor specializing in Model Portfolios

Nav
SDec 21, 2012

Bytes, BTUs and Bullion

admin

I have a confession to make. Although I’m a devoted index fund investor who has kept the bulk of his retirement and taxable accounts allocated in a way that follows the Couch Potato investing suggestions I make in this column, I’ve also got a hidden, dumb side.

It’s not a healthy part of me, so I try to keep it well controlled. Over the last 15 years about 90 percent of Burns family financial assets have been invested in a well-diversified portfolio of the low-cost index funds I write about almost exclusively. The results have been very nice.

The other 10 percent has been in an account where I pick individual stocks. It’s not a “trading account.” It’s a “keep-the-dumb-side-under-control” account. At worst it keeps me from doing dumb things with the rest of our money; at best it might fatten overall performance a bit.

There have been embarrassing moments with this account. One was during the Internet craze in the late ‘90s. I prudently sold JDS-Uniphase, a hot stock that multiplexed light waves to increase the data capacity of fiber-optic cable. What did I buy to reduce risk? Stodgy old WorldCom… Thank you, Bernie Ebbers. Stock picking is a great way to renew humility.

Fortunately, mistakes have been balanced by good moves. Last December the account had only two holdings: Apple and some cash. Over the preceding 3 years Apple had crowded out the other holdings. It kept looking better and cheaper. Everything else was looking expensive. By last January, I was a very nervous guy with 15 percent of financial assets in one stock. And even though I cut back during 2012, I’m still nervous.

Apple stock is swimming against it’s own stunning success. Does anyone not own an Apple product? It may also be the most widely owned stock in history. Those who own it have lots of unrealized capital gains. And lots of people still have unrealized losses in other stocks. So Apple has more likely sellers than buyers, even as the company continues to thrill people with its products.

So I have started to diversify. The question: Diversify to what?     

My answer: By slowly shifting from Apple to a Bytes, BTUs and Bullion portfolio. This is a portfolio devoted to technology, energy, and gold. This is my way of voting for the things that work in a dysfunctional and untrustworthy world.

Bytes. I started buying Apple shares when I saw that they were capturing young minds with the iPod and iTouch. At the Northpark Mall in Dallas crowds gathered at the Apple store while a Dell store (since closed) only 200 feet away was empty. Later, Apple introduced the iPad and created a new form for computing. I think Apple will hold mind and market share for years to come. In due course I will buy other tech companies, but for the moment, Apple is still the one.

BTUs. The British thermal unit is the unspoken currency of the industrial world. Whatever happens in technology still depends on energy. Everything else depends on energy even more. If you examine the composition of the major commodity indexes, they are mostly different forms of energy. That means different ways of delivering BTUs. As any environmentalist will tell you, all of our metals, grains and meats depend on energy supplies for their production. Earlier this year I bought shares of Chevron, Conoco and Devon. So far, Chevron and Conoco are showing a profit, but I’ve realized losses on Devon twice.

Bullion. With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. No one should volunteer for a certain loss of purchasing power. Owning gold may not be better, but it is a good response to a world of compulsory low yields and competitive devaluation of currencies.

When the world starts to see sane governments run by prudent politicians I’ll sell the gold. Until then I’ll keep buying, because I trust gold more than I trust government paper or government policy. The easiest way to hold gold (note I said “hold”, not “invest in”) is to buy shares of a major gold exchange traded fund such as SPDR Gold Shares, ticker: GLD.

Will this portfolio thrive? Maybe, maybe not. Whatever it does, it will keep me from messing with the rest of the Burns family money, and that’s why it exists.

Filed Under: Income Investing