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Learning From The Past, Part 6 [Hopefully Final, But It Won’t Be…]

This is the last article in this series … for now. The advantages of the modern era… I went back through my taxes over the last eleven years through a series of PDF files and pulled out all of the remaining companies where I lost more than half of the value of what I invested, 2004-2014. Here’s the list: Avon Products (NYSE: AVP ) Avnet (NYSE: AVT ) Charlotte Russe [Formerly CHIC – Bought out by Advent International] Cimarex Energy (NYSE: XEC ) Devon Energy (NYSE: DVN ) Deerfield Triarc [formerly DFR, now merged with Commercial Industrial Finance Corp] Jones Apparel Group [formerly JNY – Bought out by Sycamore Partners] Valero Energy (NYSE: VLO ) Vishay Intertechnology (NYSE: VSH ) YRC Worldwide (NASDAQ: YRCW ) The Collapse of Leverage Take a look of the last nine of those companies. My losses all happened during the financial crisis. Here I was, writing for RealMoney.com, starting this blog, focused on risk control, and talking often about rising financial leverage and overvalued housing. Well, goes to show you that I needed to take more of my own medicine. Doctor David, heal yourself? Sigh. My portfolios typically hold 30-40 stocks. You think you’ve screened out every weak balance sheet or too much operating leverage, but a few slip through… I mean, over the last 15 years running this strategy, I’ve owned over 200 stocks. The really bad collapses happen when there is too much debt and operations fall apart – Deerfield Triarc was the worst of the bunch. Too much debt and assets with poor quality and/or repayment terms that could be adjusted in a negative way. YRC Worldwide – collapsing freight rates into a slowing economy with too much debt. (An investment is not safe if it has already fallen 80%.) Energy prices fell at the same time as the economy slowed, and as debt came under pressure – thus the problems with Cimarex, Devon, and to a lesser extent Valero. Apparel concepts are fickle for women. Charlotte Russe and Jones Apparel executed badly in a bad stock market environment. That leaves Avnet and Vishay – too much debt, and falling business prospect along with the rest of the tech sector. Double trouble. Really messed up badly on each one of them, not realizing that a weak market environment reveals weaknesses in companies that would go unnoticed in good or moderate times. As such, if you are worried about a crushing market environment in the future, you will need to stress-test to a much higher degree than looking at financial leverage only. Look for companies where the pricing of the product or service can reprice down – commodity prices, things that people really don’t need in the short run, intermediate goods where purchases can be delayed for a while, and any place where high fixed investment needs strong volumes to keep costs per unit low. One final note – Avon calling! Ding-dong. This was a 2015 issue. Really felt that management would see the writing on the wall, and change its overall strategy. What seemed to have stopped falling had only caught its breath for the next dive. Again, an investment is not safe if it has already fallen 80%. There is something to remembering rule number 1 – Don’t lose money. And rule 2 reminds us – Don’t forget rule number 1. That said, I have some things to say on the positive side of all of this. The Bright Side A) I did have a diversified portfolio – I still do, and I had companies that did not do badly as well as the minority of big losers. I also had a decent amount of cash, no debt, and other investments that were not doing so badly. B) I used the tax losses to allow a greater degree of flexibility in investing. I don’t pay too much attention to tax consequences, but all concerns over taking gains went away until 2011. C) I reinvested in better companies, and made the losses back in reasonably short order, once again getting to pay some taxes in the process by 2011. Important to note: losses did not make me give up. I came back with vigor. D) I learned valuable lessons in the process, which you now get to absorb for free. We call it market tuition, but it is a lot cheaper to learn from the mistakes of others. Thus in closing – don’t give up. There will be losses. You will make mistakes, and you might kick yourself. Kick yourself a little, but only a little – it drives the lessons home, and then get up and try again, doing better. Full disclosure: Long VLO – made those losses back and then some.

Precious Metal Mining ETFs Head To Head: GDX Vs. SIL

Precious metals such as gold and silver are enjoying a reprieve these days, thanks to the weak September U.S. job data that has dented the possibility of an interest rate hike later this month or may be this year, which could have been the first in nearly a decade. Both the yellow and white metals were out of investors’ radar for most of the time this year. The blame goes largely to the prospect of an interest rate hike this year, a strengthening dollar, muted inflation across most developed nations and slowdown in key consuming countries like China. At London Gold Fixing , both gold and silver were down 9.2% and 12.4%, respectively, in the year-to-date time frame. However, the below par jobs’ report has raised questions over the health of the U.S. economy and the fate of the looming Fed policy tightening. Headline job gains for September came in at 142,000 versus estimates of 200,000 and the prior month’s tally of 136,000. The weak U.S. data has also disturbed the case of a stronger dollar. The Wall Street Journal Dollar Index , which measures the greenback against a group of 16 widely traded currencies, fell 0.6% to its two-week low of 87.96 yesterday. These factors are compelling investors to turn their focus on precious metals as a store of wealth and a hedge against market turmoil. Both the metals are regaining its luster lately. Yesterday, spot gold reached its highest level of $1,151.20 per ounce in nearly two weeks (since September 24), while silver touched its highest level of $16.08 per ounce in more than three months. However, if both the metals are compared head to head, the outlook for gold is stronger than silver. This is because gold has greater storage value than silver and a lift-up in Fed rates that seemed imminent before the jobs report seems unlikely in the near future. According to CME Group’s FedWatch program , traders are playing on a 31% chance of a rate hike this December, down from 44% before the release of the weak jobs data. Therefore, the yellow metal definitely has a stronger case given the prevailing near-zero interest rates, lowering the opportunity cost of holding the metal, and weakening dollar, which is the key to gold’s movement. On the other hand, silver is used in a number of key industrial applications. But the demand for silver as an industrial metal doesn’t look that good given global growth worries and decline in manufacturing activity across the world driven by the persistent decline in oil prices, slowdown in China, and continued weakness in Euro zone and Japan. In this scenario, it would be intriguing to look at two top performing gold and silver ETFs and their key differences. Market Vectors Gold Miners ETF (NYSEARCA: GDX ) This ETF tracks the price and yield performance of the NYSE Arca Gold Miners Index, which provides exposure to publicly-traded companies worldwide involved primarily in gold mining. The fund holds 36 stocks in its basket. Goldcorp Inc. (NYSE: GG ), Newmont Mining Corporation (NYSE: NEM ) and Newcrest Mining Limited ( OTCPK:NCMGY ) occupy the top three positions in the basket with shares of 7.5%, 6.1% and 5.6%, respectively. Canadian firms dominate the fund’s portfolio with a 52% share, followed by U.S. (15.5%) and Australia (10%). The product has amassed over $5 billion in its asset base and trades in solid volume of around 48 million shares a day. It charges investors 53 bps in fees per year. The fund shed around 14.7% so far this year but was up 15.6% in the past one month (as of Oct 6, 2015). Global X Silver Miners ETF (NYSEARCA: SIL ) This ETF follows the price and yield performance of the Solactive Global Silver Miners Index, measuring the performance of the silver mining industry. The fund holds 24 stocks in its basket. Industrias Penoles Cp, Silver Wheaton Corp. (NYSE: SLW ) and Silver Standard Resources Inc. (NASDAQ: SSRI ) are the top three holdings in the fund with allocations of 11%, 10.6% and 7.9%, respectively. The ETF is also highly focused on Canadian firms with a 58% share, followed by U.S. (12.3%) and Mexico (11.1%). SIL has gathered $146 million in assets and charges 65 bps in fees. It trades in an average volume of more than 231,000 shares. The product was down 20.1% in the year-to-date period but was up 13.7% over the last one month. Both GDX and SIL look like a pure play on the precious metal market. However, GDX is notably cheaper and has much higher liquidity than SIL. Further, GDX focuses on top mining companies and fared well in terms of price performance compared to SIL. Finally, GDX seems a better option to ride on the comparatively bullish outlook of gold vis-à-vis silver. Original Post