A Playbook for Investors: How to Shoot, Score, Win
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
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Miami Heat’s LeBron James has reportedly stopped tweeting during the NBA Playoffs to fully concentrate on winning a second straight title. Giving up his smartphone certainly shows commitment and dedication to success, because most people can’t give up their social connections for an hour.
It’s not only the athletes that become singularly focused on a win. Basketball fans are a dedicated group as well, especially here in San Antonio, where spectators are known to be quite fanatical about their team.
So, in the competitive spirit of the NBA playoff season, I’ve gathered a series of plays that investors can use to shoot, score and win during this year’s market. I’m happy to say they include all the elements of an exciting game, including a comeback kid, an upset and an underdog.
1. Root for Meritocracy
America is known as the land of opportunity because the nation was founded on meritocracy that rewards talents and achievements over lineage or birth position. America is the original comeback kid, inspiring many countries, as meritocracy encourages innovation, promotes competition and creates jobs. It’s what made the U.S. the strongest nation in the world, and this essential American belief is embedded so deep within all U.S. citizens, it’s like oxygen. Americans inhale and exhale it on a daily basis, but rarely focus on its vitality.
Throw open the windows at the White House because the president seems to need more of this fresh air. As shown in his recent budget proposal accompanied by a discouraging choice of words, President Barack Obama seems intent to restrain the all-American concept of self-sufficiency and success.
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One detail in his 244-page document proposes that the government “Prohibit Individuals from Accumulating Over $3 Million in Tax-Preferred Retirement Accounts.” This idea is un-American, as it discourages the very idea of meritocracy by imposing restraints on financial success.
His proposal aims to discourage those who gain “substantially more than is needed to fund reasonable levels of retirement saving” dictating that the government knows better than you how much you should strive to accumulate for your lifetime savings.
Let’s relate this idea of limiting success to sporting accomplishments. LeBron James is the youngest player in the NBA to score 20,000 points and has been substantially rewarded for his outstanding talents. With a salary of $17 million (plus millions in endorsements), “King James” makes considerably more than the throngs of fans who enjoy watching him excel on the court.
The sporting equivalent of the president’s proposal for a superstar like James is to require a 100-pound knapsack be strapped to his back to restrain him from performing to his full potential and scoring more than a “reasonable level” of points.
I believe, in sports and in business, our leaders should encourage meritocracy, not mediocrity.
Play: Root for meritocracy by telling your representatives in Washington to continue supporting retirement plans that encourage and incentivize savers and investors.
2. Student, 1; Professors, 0
University of Massachusetts Amherst graduate student Thomas Herndon became the winning underdog after he recently discovered that Harvard professors Carmen Reinhart and Ken Rogoff had erred in their famous “Growth in a Time of Debt.” When trying to recreate their research, Herndon discovered that the professors left out five countries when they calculated the average GDP growth in countries that had high public debt.
Since the global recession began, the document became the foundation and the slam dunk reason for governments to enforce austerity cuts. “EU commissioner Olli Rehn and influential U.S. Republican politician Paul Ryan have both quoted a 90 percent debt-to-GDP limit to support their austerity strategies,” says the BBC article about the student.
Regardless of the error, the research remains valid, as high levels of debt can hinder a country’s growth. But calling the data into question provides a platform for the European Union to lessen austerity measures and delay the inevitable, adding the EU to the huddle of central banks in the U.S. and Japan that will keep the printing presses warm to stimulate their economies and devalue their currencies.
Play: For investors, the important takeaway is that the student’s find results in a reinforced defensive play for gold.
3. Sidelined by low yield, central banks go for the equity play
We recently discussed how central banks have been buying gold after years of being a net seller. Specifically, emerging markets central banks are looking to diversify away from the U.S. dollar and the euro.
Now, central banks, which guard $11 trillion in foreign-exchange reserves, are making adjustments to their strategy and going for the equity play. According to a survey done by Central Banking Publications, among 60 central bankers, almost half see the need to add risk to their portfolio, and “23 percent said they own shares or plan to buy them” within the next five years, says Bloomberg News.
One superstar player of equities is Bank of Japan, which indicated that by 2014 investments in equities will “more than double.” The Bank of Korea started buying Chinese companies in 2012, “increasing its equity investments to about $18.6 billion, or 5.7 percent of the total,” reports Bloomberg.
These central bankers are moving to equities in an attempt to increase their potential yield in their portfolios in the face of negative real interest rates. Bloomberg says that while central banks have held government debt in the past, “when bond yields are below inflation in many countries [this reliance on fixed-income] risks allowing the value of reserves to decline.”
In addition, central banks are likely attracted by the dividend payouts, many of which are higher than bond yields. Dividends, along with buybacks, have been driving the U.S. market higher. As you can see below, the more companies pay out in dividends and the more they buy back additional shares, the higher stocks have climbed.
Play: Take a tip from central banks to get your money off the bench and into the equity game.
All great athletes have their own recipe for success, but they all share this idea: They play to win. I hope these tips inspired you to think like an athlete so that you can shoot, score and win for your portfolio.
