Issue 2 / August 2012
Setting Up the Systematic Revamp of Your
Portfolio – And How to
In This Issue
Start from Scratch
Click on title below to go to article
Dear Reader,
Since the 2008 crash and subsequent bank bailouts,
the investing game has changed. For those of you who
are active investors, understanding the changes and
making the necessary adjustments is what will allow
you to continue to thrive. In this month’s issue, I’ll
discuss some of these changes and how you may need
to adjust to continue to have Money Forever.
Getting the Most from Your Investment
Newsletters
Data Box
There Is Room for Speculative Picks in
Your Portfolio: Interview with Alex Daley
Money Forever Portfolio
Plan A
Street Smarts: Keeping Your Parents from
Dying Twice
End Notes
I’ll start with Getting the Most from Your Newsletters.
For the average reader who subscribes to eight or
more newsletters like I do, just reading them all can be
overwhelming. I’ll show you the steps I went through
to take a very risky, unbalanced portfolio and turn it into a balanced portfolio that I’m much more
comfortable with. Then, I’ll show you how to effectively use the various newsletters you subscribe to
maximize your portfolio.
In the Data Box, Vedran Vuk shares some terrific insights into how Social Security supposedly
keeps up with inflation. If you receive Social Security, you’ve probably noticed that prices are
increasing faster than your payments. Your intuition that something is off with Social Security is
quite right, and Vedran’s graphs bring that to life.
Our feature article this month is an interview with Alex Daley, the senior editor of the Casey
Extraordinary Technology newsletter. Alex explains how the technology sector works and offers some
great advice on how baby boomers and other retirees can approach it.
© Copyright Casey Research LLC. Unauthorized disclosure prohibited. Use of content subject to terms of use stated on last page.
We’ve also added a new technology pick to the Money Forever portfolio. It’s the first for the
speculation portion of our pyramid, and I’ll keep you posted on changes as we continue to build the
Money Forever portfolio.
Then we’ll move on to Plan A, this month’s reader question, and Street Smarts: Keeping Your Parents
from Dying Twice. Many baby boomers are looking after aging parents, and I share the experiences
my wife and I had with “Do Not Resuscitate” (DNR) orders. They’re powerful pieces of paper, and
you should know how to avoid the problems we ran into.
Let’s get on with the show.
Sincerely,
Dennis Miller
Getting the Most from Your Investment
Newsletters
Over the last few years, I’ve had to pay much more attention to looking after my life’s savings
than ever before. I often long for the good old days of 2007 when my wife and I had 100% of our
investment capital in high-yielding, FDIC-insured CDs. We had plenty of free time, and I don’t
remember worrying much about our investments. Things sure have changed radically over the last
few years.
Almost overnight I went from a carefree, passive investor to a very concerned and active investor.
I knew I needed to stay on top of our portfolio if I wanted it to last. At the last Casey Research
Summit, I led a breakout session where I outlined the steps I went through, including some of the
big mistakes I’d made.
My first hurdle was simply realizing what was happening. Interest rates were down to virtually zero,
so federally insured CDs or high-rated corporate bonds paying any kind of decent interest rate were
out of the equation. Plus, I was angry! The government was interfering with the free market and
hurting a lot of seniors and savers in the process.
Around that time I met with several friends to talk about the economy and investing, and I asked
the group, “Does anyone here know anyone with a pension who did not retire from some sort of
government agency?” All eight of us shook our heads. I’ve asked that question numerous times
since, and I always get a similar response.
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Since most people who’ve retired from the private sector don’t have a pension, they all have some sort of
IRA, 401(k), or some other lump-sum retirement account. And it’s their job to make it last. Like it
or not, we’re all money managers now.
After I realized what was happening, my second hurdle was to get over it! I no longer had time for
fantasy baseball and football, which were a lot of fun. Instead I had a new job. What could be more
important than looking after my life’s savings to make sure I don’t lose it? So I decided to quit
longing for the good old days and get on with the job.
I started to subscribe to various newsletters to learn where and how to invest our savings. They were
all written so positively and sounded so well-researched. I assumed that whatever investment they
were writing about was a good one, and while many came with caution labels, I somehow glossed
over those in my enthusiasm.
I seriously doubt that I was the only investor who wanted to make a few terrific investments like
some did during the Internet boom. Even as I approached 70 years old, I still sometimes found
myself with unrealistic expectations.
Soon most of our capital was invested, but it looked something like this: The largest percentage of
investments was in recommendations made by the author of the first investment letter I subscribed
to; the second-largest allocation was the second letter I subscribed to; and on and on. There was
no rhyme or reason to the portfolio other than the newsletter recommending an investment made
sense, so I bought in.
I even had a few investments in stocks that a newsletter author said were reasonably good takeover
candidates. Ninety days after I bought them none had been taken over, and I began to wonder what
was wrong. Now – two years later – two have indeed appreciated handsomely and we doubled our
money, but I’m still waiting on the others. Obviously, something was amiss.
That’s when I adopted the idea of using an investment pyramid similar to Abraham Maslow’s
hierarchy of needs to get organized. The Money Forever investment pyramid, which has three main
color-coded categories – Survival, Security and Something More, highlighting the increasing levels
of risk – is discussed in detail in our first newsletter.
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Time to get organized! Here’s how I turned my haphazard investments into a systematic and
disciplined portfolio. I took a sheet of accounting paper and headed up the columns as follows:
INVESTMENT ALLOCATION WORKSHEET
Date____________________________________
Account
Investments
Amount
Survival
Core Holdings
Security
Green
Security
Yellow
Security
Orange
Something More
Speculation
Totals
Allocation %
My wife and I printed a Quicken report of our entire net worth in columns one and two. Then I
looked at each investment as objectively as I could and decided where to place it on my personal
investment pyramid. I then tallied up each column to calculate what percentage of our total invested
capital it represented. Let’s just say that it was lopsided and scary; we had way too much at risk for
my personal comfort level. That was a major turning point.
I’d been using investment newsletters in the exact opposite way I should have been. I would read
the letter, and when a pick looked good, I’d somehow find the capital to make the investment. I’m
surprised by the number of people who’ve told me they’ve done the same thing. If that sounds like
you, don’t panic. Look at each investment individually, analyze your portfolio as a whole, and then
begin to rebalance it.
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Even if your current portfolio is out of balance, take your time. Calculate where you are too heavy
and by how much, and begin to take some profits from that sector. At the same time, determine
where you think you need larger allocations, and look for good opportunities in that sector. Selling
off some equities where you think you have too much exposure and holding the proceeds in your
cash account is still worthwhile – if the sector has a downturn you’ve reduced your risk. Be patient!
Not all the good opportunities in the other sectors will be available in the first month.
So what did I do? I rebalanced our entire portfolio to something more personal and comfortable
for me and my wife. I sold off some of the higher-risk stocks – fortunately for a little profit or only
a small loss – and put the proceeds back into our cash account. That’s when I began to use the
newsletters more logically. For example, I realized that I needed more income-paying stocks with a
safe and good dividend yield. I began scanning newsletters looking for recommendations that would
help fill that void in our personal portfolio. In effect, I am using the newsletters in the opposite
manner from when I started. I would read newsletters, find things that looked good, and buy them.
Now I look for areas in my portfolio where I need some additional allocation, then scan newsletters
for picks that fit that particular area. For example, I needed dividend-paying stocks. If you’re in the
same boat, Money Forever’s special report, Income-Producing Stocks, has a few good options.
People frequently ask me how to determine what color to code an investment. There’s no
easy answer. It’s really subjective, but you can’t kid yourself. Newmont Mining – our first
recommendation for Money Forever’s portfolio – is a 90-year-old company with huge reserves. Its
product always has a buyer, so it would be easy to categorize it as a Green Security pick. But a voice
in the back of my head said, “Hang on a minute; a lot of their profits depend on the price of gold.”
It’s unlikely that the company will go out of business anytime soon, but their profits are still at the
mercy of the market price for gold. That’s why it’s in the Yellow Security column for me – but some
readers may want to code it Orange in their personal portfolios. No problem: It’s your pyramid, and
investments should be in the category where you think they fit.
I also mark up the newsletters a lot more than I did in the past. If I see a pick that looks interesting,
I’ll go into my portfolio and see if it seems significantly better than what’s already in there. The idea
is to always check for potential portfolio upgrades with the understanding that you may have to sell
something from the same group to buy the upgrade. That’s how you maintain balance.
People have asked how often I review my personal portfolio. Right now, quarterly seems to work
best for me. I’ve been doing this now for a year or so, so I understand the big picture. When you
review your personal portfolio, patience is key. I didn’t rebalance mine all at once, and I’m still a bit
heavy in speculative gold stocks. I read about them every month and feel comfortable with why I
bought them, so I’m holding on to them for now. Keeping your portfolio in balance is not an event
– it’s a process. You will likely find, as I did, that things will come together fairly quickly and easily
once you get started.
August 2012
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Data Box
By Vedran Vuk
This month, the Data Box examines ways in which inflation nibbles away at your retirement
income. Unfortunately, the numbers show what most people don’t want to face: the days of relying
on Social Security plus a few stable bonds and CDs are long over. To earn decent and sustainable
returns, investors must search beyond traditional safe havens.
Inflation Is Slowly But Surely Eating Away at Social Security
Adjustments to benefits are based on the Bureau of Labor Statistics’ (BLS) CPI-W Index,
measuring prices for urban wage earners and clerical workers. The idea behind the CPI-W
adjustment is that since urban wage earners and clerical workers have constrained incomes, they will
shop in a thrifty manner, similar to retirees. This makes sense to an extent, but in some categories,
retirees will have greater expenditures. For example, older people will spend much more on health
care and much less on new clothes. The phrase, “I’ve got socks older than you, kid” didn’t come from
nowhere.
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Despite the Social Security Administration’s usage of the CPI-W for adjustments, the BLS does
track the expenditures of those aged 62 years or older through a separate index, called the CPI-E.
In this index, greater weight is placed on items such as health care, while the importance of other
items is diminished. The BLS doesn’t like to mention the CPI-E, because it shows a problematic
truth. In fact, you can’t even get the data online. You have to call the BLS and specifically get it –
which we did. That’s a strange requirement for an agency with mountains of data available online.
To create our chart, we simply tracked the difference between the CPI-E and the CPI-W to show
the slow erosion in purchasing power.
While the average annual gap between price inflation for seniors and Social Security adjustments
for inflation is only about 0.58%, that small amount adds up over time. Over the past 29 years, it’s
accumulated into a 16.7% difference – meaning a considerable loss in purchasing power. With the
average US life expectancy at 78.5 years, the typical citizen drawing Social Security from age 65
on will see the purchasing power of benefits decline by 7.8% in his lifetime. Government officials
always claim that Social Security is adjusted to inflation. In reality, it’s adjusted to an index intended
to follow inflation. If that index is off the mark – as our research indicates is the case – your
purchasing power will also be off. As the graph shows, those differences always seem to favor the
government, not the Social Security recipient.
Aaa Bonds Offer Next to Nothing and CDs Perform Worse Yet
With the Federal Reserve pulling Treasury rates down close to zero, every other interest-rate
instrument has been pulled downward as well – whether it’s CDs or Aaa-rated bonds. As our chart
shows, with inflation factored into the rate, CDs are offering negative returns. And the average
Moody’s Aaa-rated industrial bond pays only 1.4% after inflation. At the moment, savers are
getting hit harder than at almost any point during the recession.
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Initially, in 2009, the economy had a brief period of deflation that made bonds and CDs acceptable
investments – for the moment. However, since then, it’s become downright foolish to put your
money in long-term CDs and nearly pointless for Aaa-rated bonds. Moving your funds out of CDs
isn’t an investment option any more; it’s a necessity.
There Is Room for Speculative Picks in Your
Portfolio:
Interview with Alex Daley
To me, Alex is much more than just the senior editor of Casey Extraordinary Technology. He’s been
involved in numerous startups, has been an advisor to venture capital companies, and if anybody
knows how to find and take businesses out of the ground and grow them, it’s certainly him. He’s got
an excellent track record.
I was anxious to interview Alex because, like a lot of investors, I took some pretty good losses at the
end of the Internet boom. That was followed by a lot of pundits chastising retail investors for being
foolish for investing in companies with huge price/earnings ratios. Since then I’ve shied away from
the sector because I considered it too risky, but Alex gave me a whole new perspective.
Dennis Miller: Alex, let’s get started. I suspect most investors would love to buy into the next
Apple Computer or Microsoft. I’m old enough to remember when they were considered to be
pretty speculative picks, and as one approaches retirement, preservation of capital becomes a lot
more important. I’d like you to explain the concept behind your specialty of finding high-potential
growth opportunities. Do you think they have a place in the portfolio of someone who may be
approaching retirement?
Alex Daley: Absolutely. The question starts with your goals and your tolerance for the volatility
that comes along with highly speculative investing. Every person and every portfolio is a little
bit different. Risk tolerance doesn’t just have to do with age; it has to do with the individual’s
personality and what they’re looking to get out of their portfolio.
If one of the things you’re looking for is growth of your capital – maybe to keep pace with inflation
or to build your wealth – then you’re certainly going to have to take some risks to get that. However,
too often investors just look at the old “80% stocks/20% bonds” asset classification that Wall Street
thrusts upon us. That logic is based on the idea that stocks return 7-11% annually over a 20- or 30year term. But as we all know, not all stocks are created equal, and many perform far differently than
that in the shorter term most of us invest within, say 5 or even 10 years.
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A better way to look at it is to consider your portfolio as a set of slices, say 10% each. If your goal is
10% growth in your overall portfolio in the next year, you could allocate 100% of your investment
assets into stocks via an index fund and probably get somewhere near that. But you’d also be
chancing a 2008-, 2000-, 1987-type event that shaves 30 or 40% off your portfolio in a week and
takes years to recover from.
On the flip side, you could also just invest 10% of your portfolio in a set of more speculative stocks
that are likely to return 100% if they return anything at all, and you get the same net return at the
end of the year. Of course, with that kind of return profile, there is also a bigger potential downside.
You could easily lose 50% to 100% of your investment in a crash like 2008 if your picks were
universally horrific. But even then, because it was only 10% of your portfolio, you just capped your
maximum loss at no more than 10%. More realistically, it’s something like 5 or 6% in a 2008-type
event.
What would you rather have lost in 2008, 40% or 5%? At the end of the day, the Wall Street asset
allocation model is based on keeping as much of your money as possible invested in the market,
because that increases how much they make from your account. But it doesn’t have to work that
way.
If you want to see higher appreciation and are willing to take a little more risk than just 10% of your
principal, increase that allocation by another 5 or 10% slice. That’s how we look at speculation: first,
limit your risk, and then target your gains.
Viewed that way, there probably is a spot in every portfolio for some amount of speculation, because
speculation is where you’re going to find growth capital. You just have to decide, “What’s my target
for growth, i.e., how much do I want to see my portfolio’s total value increase each year, and what
percentage of my assets am I willing to put at risk?”
For some investors, that number will be 5% – for others, 20%. I doubt for many people in your
shoes, Dennis, that it’s going to be 50 or 60% like it is for someone in their 20s or 30s. Though,
if you target slightly lower-growth companies, to reduce volatility, then you might increase the
allocation and still hit your goals. It’s all a matter of what lets you sleep soundly at night.
To make it concrete, assume an investor decides to put two speculative stocks into his portfolio, at
10% of the total combined. One of those stocks doubles and the other does nothing. That one stock
that doubled provided 5% growth for the entire portfolio. Couple that with even modest growth in
the remaining 95%, like the 4-5% you can still get from some stable income funds, and the entire
portfolio will have beaten the market’s historical average, with only a small fraction of the risk.
Dennis: Interesting.
I read your Extraordinary Technology report every month cover to cover. Last month you had 25
open positions, great analysis behind them, and one of them is up almost 200%. I looked at the
number of open and closed positions, and a great number of them have been very profitable. The
fact that you have so many is an issue I’d like to address.
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I know you use filters to evaluate probably hundreds of possibilities you review each month.
Assuming that the majority of the Money Forever readers are baby boomers plus, what filters would
you suggest they use to distill something like your model portfolio or perhaps a model portfolio
in the International Speculator down to a manageable size? Most of our readers would not have the
money or courage to invest in all the picks.
Alex: One of the first things to look at is how many positions you’re going to have. If you were
investing just 10% of your portfolio in speculative picks, you certainly would not want to have 100
stocks in that slice, because hitting a home run would not significantly affect your overall portfolio.
At the same time, investing in only one stock would increase the risk of missing significantly. You
want to have enough picks to spread the risk and still provide for a major positive impact on your
portfolio when the high growth is experienced. This is a judgment call and depends on the investor’s
risk tolerance and how much they are investing. If 10% represents $100,000, you’ll make different
decisions than if it’s $1,000,000 or $10,000.
Once you have a relatively comfortable idea what the magic number is for you – maybe it’s 5, maybe
it’s 15 different companies – then look at the different types of companies that any researcher
recommends.
In our own portfolio, we have a mix of highly speculative startups, such as junior biotechnology
companies which have no revenues today but have the potential to generate billions of dollars of
sales in the long run – 5 years, maybe even 10 years down the road. So the payoff time frames for
these are very long, but the payoff multiples are very high. They’re companies that can gain 100%,
200% or more on their money in the two-year horizon, and potentially manyfold beyond that.
There are also companies in our portfolio that are a little more conservative. They’re usually existing,
revenue-generating companies which we see having extreme value or potential for growth, even
at their size. We find these situations regularly, but Wall Street has been too short-term focused,
not looking ahead a year or two and instead myopically focused on this quarter or the next. We are
long-term investors, and we don’t care if a company misses its earnings this quarter because it was
spending for an acquisition or hiring, so long as there are no fundamental problems. We’ll go after
that, so we have a lot of large-cap companies in our portfolio that have done as well for us as the
small-cap ones. They can be companies that’ll gain 50% or 60% as opposed to 200%.
A good example is iRobot. It’s a multibillion-dollar, profitable, well-established company that we
recommended for our subscribers on the back of strong demand from the military and for cleanup
efforts like in Japan. After only a few months’ time, we were able to sell and realize a 97% return.
Who says elephants can’t dance?
Dennis: I’m reading a lot lately about big companies like Cisco and Amazon. When I hear those
names I have a tendency to raise my eyebrows. I feel like they have already experienced their boom
period and I missed out. There are likely a lot of our readers who, like myself, took some big losses
at the end of the Internet boom and are reluctant to even look at those kinds of companies. Any
thoughts on that?
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Alex: Early in the interview you referred to the next Apple or the next Microsoft, and with those
kinds of stocks there is one common misconception. When most people read things like “had you
invested $10,000 in X, Y, or Z company when they went public, today you’d be a bazillionaire,” they
infer that the opportunity has been missed. That may be true in some cases, but it’s not universally
so.
Five years ago, you might have assumed IBM was dead and gone, for instance, with the Internet
adding the final nail Microsoft did not. Yet their stock is up 87% since then. The reason is that IBM
reinvented itself helping companies take advantage of the Internet and connecting business systems.
Apple is similar, up more than 375% in the same period. The company, simply put, invented an
entirely new market the size of the PC market, maybe larger, and held the lead. In both cases, it
was the size of the company going in that mattered a lot. These giants only grew to be bigger giants
because they had the capital, people, reach, and experience to take advantage of these opportunities.
Amazon is similarly up over 200% in five years, largely on the success of the Kindle, which has
defined the e-book market singlehandedly. Had it not been for its success in the paper books
market, the digital one would have been much more difficult to crack.
In evaluating a technology pick, much of our research is on the products they are developing, the
need for the product, and the potential size of the market. If it is a small company we are dealing
with, or a large one, the only difference is the relative impact of a product on the bottom and top
lines. So, if Oracle or Microsoft or Apple or Cisco is launching a new product, it has to be able to
bring in billions to be impactful. If a smaller company is coming to market with a new product, it
might take only a fraction of that to double its value to investors. But either way, it is the product
and its revenue stream that matters.
So, instead of saying, “We missed Apple,” perhaps it is better if we say, “We missed out on the
Mac or the iPhone.” That fact alone does not mean one should not seriously look at the company,
because revolutionary products are out there and significant gains are going to be made. If you
make the right pick because you understand the size of the potential market, even a seemingly
conservative investment can create a very good year for any size portfolio.
Dennis: When reading newsletters, with their “one stock at a time” approach, I think it’s very easy
for us to get excited. Every pick sounds like the next Microsoft, so instead of buying 1,000 shares
you want to buy 10,000 shares. What advice do you have for our readers on how to throttle their
emotions as they’re reading some of these newsletters?
Alex: Emotions and investing certainly don’t mix all that well. You have to be very, very careful not
to fall in love with a stock. It’s very easy, especially when you’re dealing with subscription research
where the authors have strong opinions. What I always look for is balanced opinions. If you find a
stock you like in a newsletter, research it yourself, do your own due diligence, look at what counter
opinions you see on the web. If somebody is telling you to buy a stock, look for people who are
short that stock or selling it at the moment. There are a lot of great resources out there on the web.
Try to get a balanced picture of what you’re doing or deal with a firm that tries to provide you with
as much a balance as they can in their write-up.
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Obviously we never recommend anything we don’t believe is going to go up, but we’re not right all
the time. Nobody is. So not falling in love with a provider of subscription research is as important
as not falling blindly for a stock. Make sure that you know who to trust for ideas, but don’t blindly
follow anybody or put too many eggs in one basket.
Dennis: That’s pretty good advice because, Alex, I think I’m like a lot of our readers. When I first
started subscribing, if you had looked at my portfolio six months later, it would have consisted of
stocks that had the best write-ups that did the best job of selling me on buying them. I had no
balance, so I like that aspect of doing some additional research and not getting emotional about it.
Alex: Yes. Make sure, as well, that you understand the biases that come with the newsletters that
you subscribe to. Unfortunately, a lot of information out there purports to be subscription financial
research but actually involves picks that are paid for by companies. We do absolutely none of that
at Casey Research. It’s stated clearly in our terms that we provide independent financial research
paid for by our subscribers, not by companies, which means we have different motivations than
someone who is getting paid to write a story for a company. It makes sense to not just do your due
diligence on the companies that you pick, but as well to do your due diligence and understand the
motivations and incentives that are driving the authors of your newsletter.
Dennis: My last question. I kind of chuckled to myself as I prepared for the interview. Probably
the first investment book I ever read, the author made the distinction between a “speculator” and
an “investor,” so the idea of a speculative investment is almost an oxymoron, but they have to be
out there. Do you have one suggestion for our readers that you’d suggest to your parents or retired
grandparents that is perhaps both a speculation and relatively secure in your mind?
Alex: Sure. So – just to go back to the point from the book first, before I provide a pick –
speculation is an activity; it is not a person. There’s no person who’s pure speculator, and no one who
is the antithesis of that. Even Warren Buffett has his share of speculative positions that he buys with
the intention to later sell. For the most part, he’s a traditional investor: buy, hold, and live off the
profits of the companies. But he has the unique advantage of accessing deals off the public markets.
As public stock-market investors, it’s harder and harder for us to be traditional dividend-paid
investors, given where yields are today, so more and more every one of us has to become – and we’re
forced this way partially by policies put in place by the government – more speculative.
It makes sense to understand how a speculator operates, how they look at opportunities, because if
you’re buying a stock with the intention of selling it later, you are, by definition, a speculator.
Now, I don’t normally share recommendations with people who are not subscribed directly to my
publication, as the advice on when to sell is just as important as what and when to buy. But given
your connection with Casey Research’s analyst team, we can keep you up to date on that. So let me
provide two example companies from our portfolio, one in the low- to moderate-risk category and
the other one of those more speculative picks we discussed.
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Let’s start with Cisco Systems. Cisco has seen its stock yo-yo a bit over the past two years because
of execution problems with its management. The company got a little too heavily involved in lowmargin businesses like home networking, and put a really heavy push behind video conferencing,
which is a technology that has been around since the 1950s, but perennially fails to “take off ” – not
because the technology isn’t there, but because, frankly, people just don’t want to do it. But much
of that is changing. They’ve focused back on their core business, which is providing the routers and
switches that make the Internet work, and they’ve seen, for a multibillion-dollar company, very solid
growth rates – high single-digits in revenue and equivalent in earnings. Given the large amount of
cash they hold, their nonexistent debt, their healthy dividend payout ratio, and their renewed focus,
we believe Cisco is now undervalued and has considerable potential for gains around 25-30% over
the next two years, on top of the income stream. They’re one of those behemoth companies we
discussed that are going nowhere, pay a very healthy dividend to compensate you for holding them,
and have a lot of potential for their share price to rise over the next couple of years.
Now obviously our specialization is the more junior, speculative side of the portfolio. In that space,
one of our most promising picks today is Sequenom [SQNM]. The San Diego-based company
began its life as a genetic sequencing company – a very crowded field these days, with tough
competition and rapidly dropping prices. The company has been successful nonetheless in that
business, growing revenues from $37 million annually to $47 million in two years’ time. But the real
growth we are excited about has come from a new, rapidly growing business the company has been
developing: molecular testing.
Their first major product on the market is a test for Down syndrome in the fetus of pregnant
mothers. Traditionally, that was a dangerous test that involved taking amniotic fluid, risking the
health of the baby, and requiring results to be processed by sending away fluid to a lab. However,
thanks to MaterniT21 PLUS, the test developed by SQNM, the procedure is now simple, in-office,
noninvasive, extremely accurate. Materni21 PLUS tests for trisomy 21 (i.e., Down syndrome), as
well as the rarer and deadlier trisomy 18 or 13, and can be done as early as week 10. All it requires is
a small, standard blood sample from the mother. Thanks to these huge benefits both in safety and in
cost, it has the potential to become a standard screening procedure.
The company is not just limited to the one test, either. They have in development potential tests
for RhD hemolytic disease, another potentially serious pregnancy-related disorder that is rooted in
genetics; a cystic fibrosis screen that can be taken pre-pregnancy; and a test to detect the potential
for adults to develop wet form macular degeneration, which may help aid early detection of the
disease and allow for more effective treatment.
With just one test on the market, the company has gone from basically zero to $8.7 million in
revenue for the division in just two years. And now it is taking off like a rocket ship. Our estimates
peg the growth rate for the Materni21 PLUS test alone at $160 million over the next two years.
This should bring the development-stage company to profitability in 2014, where we have a price
target on the shares of about $7 – nearly double today’s trading price.
August 2012
Miller’s Money Forever
13
Of course, in any development-stage company there are many risks. The company has to manage its
cash effectively. New competitors will surely arise. But we believe that SQNM has the right mix of
good management, good economics, and great technology that is required to make a success in this
industry.
We obviously have much more than just those two in our portfolio, but they’re good examples of
the kinds of technology and companies we like.
Dennis: Alex, I’ve learned several things today. The technology sector is one that our readers should
take a real look at. It could certainly help offset the lack of safe, fixed-rate returns, which are no
longer available. While the metals and energy sectors also offer us large potential opportunities, a
baby boomer plus would do well to expand the speculation portion of his pyramid to include some
of the technology sector also. Again, do your homework and invest in moderation.
Alex: Yes. There’s a handful of markets that are still really good for individual investors and
individual speculators. There are a lot of people out there who would push you toward markets
like forex and commodities, but a lot of those markets are very difficult for individual investors to
navigate successfully – the odds are simply stacked in favor of institutional investors.
Junior mining, junior energy, junior technology, however, are three of the markets where an
individual investor can carve out an advantage. Your ability to do due diligence on companies that
investment banks have yet to look at in-depth gives you an informational edge in forecasting value.
Any market where companies are still small and too numerous for any bank to track all of them – if
you pick the right companies in those markets, you can find growth at an incredible value. And over
time as those companies post strong results, they’ll get picked up by mainstream investors and by
large institutional investors, and they’ll see their share price rise as the risk premium is reduced and
growing expectations get priced in, as more and more eyeballs are focused on them.
So it’s a great place to be invested, yes. But you have to be very careful not to fall in love with a
stock or fall in love with any particular analyst. Make sure you keep a balanced, healthy mix of
stocks in the speculative portion of your portfolio, small enough to make big gains but not so small
that you overexpose yourself to the risks of a single company.
Dennis: Super. Alex, as you well know, I now have access to the heavy-duty research experts, and
you’ve given us a good place to start. I’m sure we are going to be looking to put some of these in the
Money Forever portfolio this month. I really appreciate your input and your help, and thank you for
your time.
Alex: Thank you for having me, Dennis.
Alex has done a terrific job with his newsletter, Casey Extraordinary Technology. His track record of
finding winners in the technology sector is terrific. If our readers want to look more in depth at the
technology area, I would suggest you invest in a 90-day trial subscription. While some of the picks
would fit in the Speculative portion of our pyramid, there are others that are less speculative and
would also fit well in the Security section.
August 2012
Miller’s Money Forever
14
Money Forever Portfolio
When I asked Alex to do an interview, I wanted to come away with a renewed perspective on the
technology sector. Medical breakthrough products and iPads are doing well despite tough economic
conditions, and they provide some fertile hunting ground.
We’re not, however, adding Cisco to the Money Forever portfolio this month. But please don’t
misunderstand – we think it’s currently undervalued and has very good potential. Cisco made the
short list for our Income-Producing Stocks special report, but we chose to add Intel instead. Intel
was paying a 3.4% dividend, while Cisco’s was 1.8%. Both seemed undervalued, but Intel’s higher
dividend lured us in. And even with Cisco’s recent giant dividend increase to 2.95%, Intel still beats
it. However, if you have a larger portfolio with more room for additional picks, you should certainly
consider adding Cisco as well.
We are adding Sequenom (SQNM) to the Speculative section of the Money Forever portfolio. It’s
been fully researched and there’s no reason not to act.
Money Forever Portfolio
Rec
Recommendation Stats
Price at
Publication
Buy Baker Hughes Incorporated (BHI)
Price on Rec (8/13/2012): $47.99
Buy General Mills, Inc. (GIS)
Price on Rec (8/13/2012): $38.50
Buy Hess Corporation (HES)
Price on Rec (8/13/2012): $49.09
Buy Intel Corporation (INTC)
Price on Rec (8/13/2012): $26.69
Buy Newmont Mining Corp. (NEM)
Price on Rec (8/13/2012): $46.92
$47.81
Dividends
Moderate Risk
0%
Total Received $0;
Projected Yield: 1.2%
$38.81
Low Risk
1%
$50.49
Low Risk
3%
Total Received $0;
Projected Yield: 3.4%
Total Received $0;
Projected Yield: 0.8%
$26.23
Moderate Risk
-2%
Total Received $0;
Projected Yield: 3.3%
$47.93
Moderate Risk
2%
Total Received $0;
Projected Yield: 2.7%
Buy Silver Wheaton Corp. (SLW)
Moderate Risk
Price on Rec (8/13/2012): $30.68
August 2012
Gain/Loss%
$32.39
Miller’s Money Forever
6%
Total Received $0;
Projected Yield: 1.2%
15
Money Forever Portfolio
Rec
Recommendation Stats
Price at
Publication
Buy Statoil ASA (STO)
Price on Rec (8/13/2012): $24.96
Buy Sequenom, Inc. (SQNM)
Price on Rec (8/20/2012): $3.56
Gain/Loss%
$25.23
Low Risk
1%
$3.56
High Risk
0%
Dividends
Total Received $0;
Projected Yield: 4.3%
No Dividend
Plan A
This month’s reader question is from Alex L, who is a member of my Super Sports Roadster club, a
“collaborator-friend,” and big help in getting the Money Forever project started:
Dennis, you started actively managing your portfolio when your CDs got called in and you were
sitting on cash. What do you suggest for people who already have a portfolio but might want to
rearrange it a bit?
It’s a good question, and one that I’ve been asked frequently. Let me reinforce one critical point. Do
not do what I did and start reading newsletters and buying into investments because they sound
like winners. There is a good chance you’ll just compound any problems in your portfolio.
A major component of my business career was consulting for small businesses. This was usually a
three-step endeavor. First, the client recognized they had a problem and usually had a pretty good
idea of what they needed to do to solve it. Second, they asked for help because they didn’t know
how to implement their solution. And that’s where I stepped in: putting the solution into action.
Alex L’s question presents a nearly identical situation. Many investors are uncomfortable with their
portfolio balance, and most realize that the solution is rebalancing things in order to meet their
goals, but they need outside help to rebalance.
Before you make any trades, start with the process. Take each and every investment you have and
build your personal investment pyramid. The Money Forever portfolio is only a starting point. Each
investor has to determine his own personal allocations. After you have done that, you’ll find the
holes that need to be filled, and where you’re over-allocated.
August 2012
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There are five criteria which should be looked at for every investment:
1. Is it a solid company or investment vehicle?
2. Does it provide income?
3. Is there a good opportunity for appreciation?
4. Does it protect against inflation?
5. Is it easily reversible?
Look at each investment you currently own and see how it stacks up. Safety is a major concern for
two reasons. First, retirees and people approaching retirement cannot afford to take a major portion
of their life savings and gamble on a Facebook IPO going through the roof. The risk is simply too
high.
Second, there is a grey cloud on the horizon called “inflation.” The Treasury Department reports
that on February 28, 2006, our government debt ceiling was $8.2 trillion. On January 31, 2012,
Congress approved a debt ceiling of $16.4 trillion, which should be reached by the end of this year.
We did not double our national debt by selling debt instruments to foreign governments and
investors. A major portion of the increase was sold to the Federal Reserve. In essence, the money
was printed or created by accounting entry. That’s why combating inflation is vital.
The inflation problem is masked for many investors. In today’s climate, if you have a high-quality
bond or CD, collect the interest and then pay the tax on that interest, your net yield could be 1% or
less. With the Fed printing plenty of money, a 5% inflation rate is not completely unforeseeable in
the near future. In round numbers, over a five-year period, your principal around such an inflation
rate would buy 82% of what it did five years earlier when you purchased it.
While I’m approximating to make the point, if you had a $10,000 CD at the end of a five-year
period, your $10,000 would buy what $8,200 bought five years before. On the other hand, you
would need $12,200 to buy what $10,000 bought five years earlier. Your goal is to keep up with and
stay ahead of inflation, not to lose ground along the way.
Using these criteria, look at each investment in your current portfolio and see how they stack up.
Hopefully most do very well. If not, you’ll know where you might want to begin to liquidate and
rebalance.
August 2012
Miller’s Money Forever
17
Street Smarts:
Keeping Your Parents from Dying Twice
In 2000, my high school hosted a class reunion for all of its twentieth-century graduating classes. It
was actually attended by some folks who graduated in the late 1920s; everyone from my graduating
class of 1958 was about 60 years old at the time of the reunion.
As we sat around tables with “1958” on a little flag, one of the first questions we had for each other
was whether our parents were still alive. Many folks were clearly concerned about how to deal with
aging parents.
Through the miracle of the Internet, I stayed reconnected with many of my classmates, and the
issue of parents in nursing homes or assisted-living facilities became a recurring theme. Shopping
for Medicare supplementary insurance, considering when to take away dad’s car keys, and helping
the surviving parent when the other dies became common discussions. Many of us were not only
looking after our own affairs, but also the financial and life issues of our parents as well.
The goal of Money Forever is to help our readers have enough money to last the rest of their lives,
and sometimes that means addressing “life issues” by sharing experiences of people who are a little
ahead on the learning curve.
When my wife and I were married in the late ‘80s, her father was in the advanced stages of
Parkinson’s. After asking his permission to marry his daughter and promising to take care of his
girls (wife, daughter, and granddaughter), he reached out, trembling, to shake my hand. By that
time, almost anything that touched his hands and feet caused him severe pain. When my wife
trimmed his fingernails and toenails, this once proud man would cry out in pain.
We moved the wedding to the nursing home chapel, which was the least we could do for such a
fine man. The staff wheeled his bed into the small chapel and we all crowded in for the marriage
ceremony. My wife snuck him a piece of cake when we went back to see him the next day. He had a
feeding tube, but he managed to swallow a few small pieces of cake and icing with a huge smile on
his face.
A few weeks later his suffering stopped, and mercifully he passed away. After the funeral my wife
mentioned, “That’s actually the second time Daddy died.”
“Huh, he died twice?” It seems he had a heart attack and died, but then they zapped him with the
paddles and revived him. My wife mentioned that they had a “DNR,” but it was ignored. What the
heck is a DNR?
A DNR – Do Not Resuscitate – is a form that notifies emergency medical personnel that they
should not bring you back to life. My father-in-law had had one ever since his Parkinson’s
progressed to its final stages. I asked why it had been ignored. My wife assumed it was because
it hadn’t been filled out properly. Even though he’d lived three more years and seen his daughter
remarry, he’d endured three more years of terrible suffering, and we wanted to learn from that
experience.
August 2012
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Almost a decade later, my stepfather moved into an assisted-living facility. He was 90 and had all
his mental faculties, but couldn’t drive or live on his own. We brought up the DNR issue, signed
all of the proper forms, and the administrator of the facility told us everything was in order – so I
thought, “OK, good; we got them filled out right this time.”
About three years later, we got an emergency call that Dad was in the hospital. We raced to the
hospital and discovered he’d passed out in the assisted-living facility. They had called 911, and he
was rushed to the hospital in an ambulance. He was awake and alert when we arrived, and I asked
what happened. He told me that he was walking down to have lunch when he thought he was a
little tired. He stopped to rest, sitting on a piano bench in an alcove in the hall. The next thing he
remembers was being in an ambulance with an emergency responder screaming at him and zapping
him with the paddles like you see on TV. Sounded to me like he was revived just like my father-inlaw had been years ago.
The doctor came in, examined Dad, and looked at all his charts. He said there was nothing
medically they could do for him and suggested hospice care, meaning death was imminent. We all
signed the necessary forms and were told he’d be transported to the hospice facility the following
Monday.
Then I went down to the emergency room of the hospital to find out what had happened with
Dad’s DNR. The head of the emergency room nursing gave me quite an education.
From there I went to the assisted-living facility to ask the same administrator what had gone wrong
with the DNR we had filled out and signed – with her assistance and reassurances – a few years
earlier.
She thumbed through his file for about ten minutes, and when she got almost to the bottom she
pronounced, “Here it is!” very proudly.
I then proceeded to tell her the folks in the emergency room said that the DNR must be displayed
where they can immediately find it – a copy over the head of the patient’s bed and on the back of
the door as a minimum. The emergency personnel are not going to search around for it: If they do
not see it, they are going to do their job and revive the patient, which indeed they did.
At that point I told her the story about what Dad last remembered, thinking he would take a rest
and sit on a piano bench. I then asked the lady, “Wouldn’t that be a peaceful, wonderful way to die?”
I proceeded to tell her he was now in the hospital, very frightened, and knowing that next Monday
he was headed to hospice to die. I told the administrator that because of their ineptitude, they took
his peaceful death away from him. I stopped and let her reflect on that for a moment, as she was
truly concerned – maybe about Dad or maybe about a lawsuit.
We didn’t sue, but I did point out to her that she likely has the same problem with every person
they have in the facility, and they better doggone sure get with the EMT people to get it corrected.
Dad died shortly thereafter, peacefully in his sleep. He never made it to hospice. We came back
to clean out his room. I was assured that the situation had been dealt with, and she showed me
evidence of what was now displayed in many of the other patients’ rooms.
August 2012
Miller’s Money Forever
19
Here’s what I learned. Each state and area is different. Several of our friends asked us about our
experiences and how they might handle the situation as they were putting their parents in a
home. At our suggestion many went to the emergency room at the local hospital and over to the
fire station where the ambulances are housed, and did their due diligence regarding the proper
procedures for a DNR. They did not want to experience what my wife and I and our fathers had
gone through. I strongly suggest that if anyone is thinking about a family member or friend going
into a home, do your homework locally. I cannot emphasize enough, after seeing both of our fathers
endure both physical and emotional suffering, that you need to do your homework.
One of our friends mentioned to us, after doing her research, that had we done everything the nurse
in the ER told us, they still would have revived Dad. He was sitting on a piano bench 150 feet from
his room, and there was no way they would have run down to his room and searched for a piece of
paper. She is probably right. Our friend ordered a MedicAlert bracelet for her father with DNR
instructions clearly engraved. The DNR instructions for emergency personnel must be proper and
immediately available. It was less than a year later that she called us to thank us. They got it right!
END NOTES
Over my investing life, I’ve invested in some very speculative issues a few times, and I’d like to share
some of my experiences.
Being a good investor is a combination of many things, including understanding what you are not.
When it comes to targeting technology opportunities, I am not an expert. Once you as investors
understand your limitations, you can seek out the real experts and let them educate you. Once you
understand a potential opportunity, its products and market, you can make a much more informed
decision. I’m sure I’m like many of our readers who can recite stories of losing money investing in
things they did not fully understand.
When I read articles talking about the millions I would be worth had I invested in Apple or
Microsoft, I felt like I missed out. Microsoft started in 1979 and Apple started in 1976. While Bill
Gates and Steve Jobs were visionaries, it’s easy to forget that those mega-lottery opportunities were
available 30 years ago.
I can still recall the first time I invested in a pick that was called “a high-profile takeover candidate.”
Three months later I was frustrated because it hadn’t happened. The biggest challenge my broker
had was teaching me to have realistic expectations. Two years later, it was taken over, and I paid off
the house.
I urge all readers to use moderation with all of our speculative picks. We are going to be looking to
diversify the speculation portion of our pyramid in future issues. Hold some cash in reserve.
August 2012
Miller’s Money Forever
20
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August 2012
Miller’s Money Forever
21