Is joining an investment club a good idea?

Now, you can learn about investing in countless books, magazines and Web sites, but you may enjoy the learning process more by joining an investment club. After all, most of us are social creatures by nature, so we like being with other people.

A blogger that I follow “Bear With The Bull” belongs to a club that just shares investment ideas. He was kind enough to answer a few of my questions about his club.

How many members are in your club?

“We currently have 36 members on Meetup, not all are active. We use Meetup.com as our internet platform and we have a Facebook group page as well.  We have a 6 month activity clause. Basically we remove anybody who is inactive for 6 months.”

How often to you meet?

“We meet once a month at a local Denny’s. We try to keep the meeting short less than 2 hours. We usually have anywhere from 3 or 4 to a dozen or more show up for the monthly meetings.”

What are the experience levels of the membership, any newbies to investing?

“We have all different experience levels and investment styles. It was surprising to find out that we have pure Chartists, option traders (mostly selling), IBD folks, and people who followed other systems and sites. This past meetup we had 4 new members.  1 newbie, 2 experienced traders but new to IBD (Investor’s Business Daily), and a retired couple who had just consolidated their retirement portfolios into one.”

Is every member required to bring a stock pick or ETF to the meeting or do you take turns?

“A week before each meeting we send out an email asking for stocks and investment topics of interest. Basically this is a solicitation for topics and stocks to discuss and forms the basics of our agenda. We generally give each person the opportunity to talk about their suggestions during the meeting.”

Do you find the information useful and have you invested in any ideas that were presented?

“Generally I and others in the group find the information interesting and informative. Sometime members invest in others watch lists but for the most part I think people use it as a learning experience.”

Are recommendations review at the next meeting?

“We keep a list of all stock suggestions and track their performance. We do keep an informal tally of whose stocks are best or not.”

Thank you “Bear With The Bull” for sharing information about your investment club!

Now, do you lack the confidence or discipline to invest on your own? There are also investment clubs that you can join where members’ pool their money, study different investments and the group decides to buy or sell based on a majority vote. Most of these clubs require a small monthly investment anywhere from $50 to $100 a month.

Some Advantages:

  • Investment clubs can be fun.
  • It is a good way to get your feet wet.
  • Clubs provide an affordable way to invest. (Sharing the costs)
  • Investment clubs, by their very nature, tend to have a long-term focus. Members are interested in following investments over time, not buying and selling at a frantic pace.
  • You can find wisdom in a group

Some Disadvantages:

  • Unregulated – You have to have a high degree of trust. (Income & tax liability is calculated correctly)
  • Disagreements – Democracy is great but you could disagree with the direction of the club or with some of the investments choices.
  • Risk tolerance – Make sure that you’re comfortable with a club’s investment philosophy and the amount of investment risk.
  • Difficulty leaving – Make sure that the club has a reasonable exit time for members who want to leave.

Did you know that Warren Buffett’s wealth to acquire Berkshire Hathaway in 1965 was created primarily from his investment partnerships? The first of which was Buffett Associates, established out of his bedroom in May 1, 1956, at the age of 25. It started with $105,000 from seven partners, all of whom were close family and friends.

He was solely responsible for managing a significant amount of other people’s money with investors agreeing to pay a fee for strong investment performance. These investment partnerships eventually fell under the umbrella of Buffett Partnership, Ltd., which was the entity that bought a controlling stake in Berkshire Hathaway.

I would classify “Buffett Associates” as a legalized type of investment club.  

On a personal note: My investment club just celebrated it’s 15 year anniversary.

Gilead Sciences: A buy, Sell or Hold?

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Many money managers have made Gilead a top investment pick when interview on some popular business shows. I never buy a stock based solely on the recommendation of a media personality. However, I will put it on my watch list and do some fundamental research and study some chart patterns.

Back in November of 2014, I decided to dollar cost average some Gilead shares using a strangle option strategy. I ended up owning 200 shares at $102.00 and made some nice profits selling covered calls. Unfortunately, the share price has been in free fall since Aug of 2015. See the chart below:

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I managed to reduce my average cost down to $90.50 but Gilead tumbled to a record low on Feb 8th after the company provided guidance for fiscal 2017 revenue, which missed analysts’ expectations. See press release:

The research-based biopharmaceutical company said it expects fiscal 2017 net product sales of $22.5 billion – $24.5 billion, below the Capital IQ consensus estimate of $27.98 billion.

Gilead reported late Tuesday Q4 non-GAAP earnings of $2.70 per share, a dime better than the analyst consensus on Capital IQ. Revenue was $7.32 billion, vs. expectations of $7.16 billion.

HCV product sales, were $3.2 billion for the fourth quarter of 2016, compared to $4.9 billion for the same period in 2015.

Price: $65.93, Change: -$7.20, Percent Change: -9.85

Is Gilead turning into a value trap or a real value investment?

valuetrap-300x250

This stock is cheap with a PE ratio of 6.68 compared to the biotechnology industry average of 34.55. Gilead has a 3.13% dividend yield which is the highest within the industry. It has one of the highest ROEs of all companies in the biotechnology & drug industries. Although, EPS growth at Gilead is declining, it is still above the industry average.

The biggest problem with this stock is the biotech industry is experiencing positive revenue growth as a whole but Gilead has been unable to grow revenues and is losing market share. This negative trend has been continuing from the previous year when revenue growth at Gilead was -13.94% while the biotech industry was up some 202.65%.

I hate throwing good money after bad in the hopes of breaking even. So I am not big on averaging down on a losing position. I have been fighting a losing battle on this stock for quite a long time. However, I am anticipating a dead cat bounce off the bottom if some deep value or dividend investors decide to buy. I think that I should take a lost and buy something else. What do you think?

Do you own Gilead, are you going to average down, sell for a lost or are you going to continue to hold?

Gold as a hedge against Trump’s Border Tax

Talk of a “border adjustment tax” has gone from the sidelines to center stage in Washington, which has a lot of people asking: What is it exactly?

Currently, U.S. corporations are taxed on their worldwide profits at 35 percent. The House GOP plan would change that radically. The new tax formula would tax domestic revenue (minus domestic costs) at a much lower rate of 20 percent. The net effect would be one that favors exports over imports.

The change would convert the country’s tax system to a “territorial” system rather than a worldwide tax system. It’s meant to create incentives for domestic production because companies also would no longer be able to reduce their taxable income by deducting their overseas expenditures.

The plan would essentially subsidize exports and lead to a 20 percent tax on imports for corporations.

Retailers are very opposed to a border adjustment tax because a large percentage of the products they sell are imported. The end result is Americans will pay higher prices for consumer goods including imported fruits and vegetables.

Now economists who support the tax say the policy would lead to a sharp rise in the value of the dollar. As a result, retailers’ costs will go down so much that it will be a wash to consumers. However, many CEO’s worry whether the economists are right in that assessment.

In the past, gold and gold stocks have been used by money managers to hedge against inflation, currency risk and world chaos. For years, financial advisors recommend having 5% to 7% of your portfolio in gold or gold stocks.

Unfortunately, we have been living with deflation so gold as an investment has not performed very well over the past five years. The chart below compares three ETFs – gold bullion GLD, large cap gold miners GDX and junior gold miners GDXJ

gold

The border adjustment tax could change all that. It could cause mayhem in world trade, leading to higher inflation and extreme volatility in currency markets. The chart below illustrates the 2017 year to date price movements in the above mention ETF’s

gold-1

The biggest risk to owning gold or gold stocks is if the Fed’s interest rate policy changes and they are more aggressive in raising rates. This could cause the value of the U.S. dollar to increase which would be bad for gold.

Fed watchers believe that the June meeting would be the earliest date for an increase in interest rates. The stock market has only priced in two rate hikes for all of 2017. President Trump’s immigration ban and talk on renegotiating trade deals will be in the news for the next few months making investors nervous.

I am considering three short-term trades in gold

  1. Dollar cost average: Buy 300 shares of GDX  at 24.50, Sell 3 Apr 26 call options for $1.20 & Sell 3 April 24 put options for $1.50 (Total investment = $6540.00 U.S.) 
  2. Covered call: Buy 100 shares of GLD at $116.20, sell 1 April $118 call for $2.25 (Total investment $9,370.00 U.S)
  3. Call spread: Buy 5 GLD April $110 calls for $7.10 & Sell 5 GLD April $118 calls for $2.25  (Total investment =$2,425.00 U.S.)

 

The problem with using options in these trade choices is the VIX that measures volatility is quite low. Having to wait until the April 19 expiration date reduces the profit potential. That being said, I think that the first trade is less risky, if I am wrong on the direction of the price of gold. I would own 600 shares of GDX at an average price of $ 22.90 but could then sell more call options.

Do you own any investments in gold stocks or gold ETF’s?

 

Disclaimer: These are not recommendations, please do your own research before investing.