(B)(N) World Trade & Global Gold

How much do you think?

Drama. The most important asset that investors own is neither their money nor their gold but the stock market itself and the daily buying and selling of stocks in an open market of bid and ask prices and it is the only asset that they (in aggregate) have actually created and which they “own” and are running like a “company” for profits and losses that belong only to them.

But it raises the question of what we’re buying and what we should pay for it and it’s certainly not the companies that are in it which are merely the underlying and our common stocks are just an option to buy and sell them at the market prices.

For example, our World Trade Portfolio (the Market) has over 2,000 companies in it and it is currently worth $50 trillion of other peoples money in a dozen markets all over the world and the companies in that portfolio (the underlying) earned $2.4 trillion last year and they gave half of it ($1.2 trillion) to their shareholders (the investors), which sounds like a lot of money but the aggregate dividend yield is only 2.4% or 2½ cents on the dollar.

Figure 1: The King’s Stock

In other words, we need to spend $1,000 to buy and hold those stocks for a year just to earn $25 in dividends and the price of a dinner once a year and since we need to eat every day, the price of a living at the poverty level ($25,000 a year) is $1 million today and, therefore, we’d need to spend 40× as much today to buy a living as the living itself for this year and, hopefully, we’ve paid for every year thereafter if the companies that we “own” in our portfolio continue to produce their dividends and they likely will; please see Figure 1 on the right for an illustration (and click on it and again to make it larger as required).

And we’d need 50 million of those investors – a small country or half of the adult population of the US – to buy today’s market which is already worth $3 trillion more than last year and although every investor will have a different story about dividends and capital gains, the market has already paid for the dividend and we will have to pay still more as long as there is no cheaper way to earn a living (such as in high yielding government bonds which interest is paid for by the tax payers although the current long bond rate is only about 2% per year and unlikely to increase).

But that’s the point because the investors are willing to pay $22 for $1 of the earnings of these companies (the aggregate [P/E]-multiple is 22×) and, so, they must really believe that their dollar is worth only 5 cents to them or less or maybe nothing in their pocket or in their savings or their pension plan or mutual fund, but all of $22 to the other investors who won’t let them buy the stocks for less than that if they can help it.

And, therefore, it raises the question of what should we pay for stocks if we are willing to pay $22 for $1 of earnings but, as above, only get 50 cents of it?

And the answer is whatever it takes to buy them because our cash money doesn’t buy an income, it only buys things and with too many things such as life, war, pestilence, illness, divorce, taxes and inflation and so forth, it will all be gone in the absence of an income.

The Corporate Royalty

Figure 2: Arbitrage

It’s a simple equation and we can, of course, deal with it with just a stock chart, a ruler, and a good eye (please see almost any of these Posts for exactly how we always buy low and sell high without fail regardless of the market “volatility”) and we thrive on their opportunism in both the long and short portfolios; please see Figure 2 on the right for a primer on arbitrage.

But does it help if we buy stocks for “good value” (The Real Intelligent Investor) even as the market buys whatever it pleases including losses, negative net worth, negligible fixed assets or inventory or no dividends and [P/E]-multiples in the high double digits?

And the answer is no, it doesn’t matter as long as we’re investing for 100% capital safety (arbitrage).

But we’ll also find (Exhibit 1 below) that we tend to make vastly more money by investing in the Bourgeois (or Peasant) Stocks, so to speak, because there are more of them and there is a lot more money in the float between buying and selling and they are more excitable, anxious, and willingly or not, they (The Market) will give us more of their “earnings” in capital gains which the Corporate Royalty (the King’s Stock) will not.

And, so, we have to deal with the disturbing notion that investing is not only about buying “good value” and being smart, but that it’s even more about buying “terrible value” beginning at $22 for $1 of the earnings (good or bad) and making a living from it and that is a genius endeavor because it requires a new idea to solve a very old problem that has been punished but not solved by a generation of economists; please see Exhibit 1 below.

Exhibit 1: The Fundamentals of No Risk Investing

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy, UFOs and the High Flying Techs, and The Coal War which is heating-up again now; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that as well as The Great Rotation & Twenty Hot Canadians 2017.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.