Tuesday, August 19, 2008

Common Sense Investing Idea

In the last couple months, I have contemplated what to do for investing. It's a tough market out there, and I am trying a different take on investing. In the past, I have discussed foreign equities, bonds, or CDs for diversification. I have done some precious metals investing, but that is more of a basic savings operation. Recently, I have turned to the idea of personal hedging. Robert Shiller wrote an article about hedging for the average joe six pack and how more options should be available for individuals. He's pretty smart, and I would say his books and this interview are proof positive (that interview is from late 2004, scary how things have unfolded) Shiller wrote an article that is much more eloquent than my little blog about this concept. I'm looking for opportunities to apply this idea to my life and my investments. Think of the old saying "write what you know" and invest in that manner.

My parents already did this when they told their heating oil company they would lock into home heating oil costs for the winter at $4 a gallon. My sales pitch for a ground sink heat pump didn't work. Say you have a job that involves a lot of driving, which can eat into your profits or increase your out of pocket expenses. Maybe an investment that rises will the price of oil or gas could help offset the pain at the pump. I recently looked around and saw BP and Shell on my credit card statement, and thought, why not buy BP or Shell stock and get something back for my money. It's like having a kid and buying Disney stock on the very same day. You know those bloodsuckers at Disney are going to get money out of you, might as well join in on the fun. Yes dividend payments and capital appreciation may not keep up with what you shell out for these companies, but it can hedge those expenditures.

Some that I have considered and researched recently have been PWE, DUK, ACI and BP. BP is self explanatory since I fill up every single week, and when oil prices do rise again, at least I can ride the wave a bit. DUK is my electric company. Utilities are usually safe bets, and DUK has a nice dividend (slowly increasing) and diverse sources of power generation (coal, wind, nuclear, etc.). If my electric bill goes up, well my dividend checks can help offset that pain. Sounds dumb, but it sounds like common sense investing. ACI is arch coal, and no matter what we do with energy, coal is still going to fuel much of the world's energy needs in the near future. The PWE is a nat gas trust product from Canada. If I heat my future home (t-minus 10 months) with nat gas, an investment that pays a 13% dividend is a nice hedge. I can't get excited about UNG because it doesn't pay a dividend (same goes for heating oil hedges people of the northeast).

Touching on a topic on the tips of most people's tongues, I see nat gas as an energy source that will get lots of love in the next presidential administration because it is a domestic energy source (I count Canada as quasi-domestic as NAFTA almost makes it so) and US production has increased quite a bit in the last 18 months with more coming online soon. I see much of the transportation infrastructure in America moving to electrification whether through mass transit, hybrids or electric cars. Nuclear really should be the backbone of our electricity generation (like in France), but hippies don't like it for fears of doomsday scenarios (despite the damage coal does everyday). I'd love to believe in a world where wind and solar could power all of our electricity needs, but that world seems far away (20+ years). Even with wind and solar farms being built, they take time to build, time to link to the grid, and only provide intermittent power (until we figure out how to do better energy storage). Nat gas is still going to be used in electricity generation because it fires up generators quickly when wind and solar can't produce. Part of the problem is the energy markets have been so bubbly that I only want to dip my toe in slowly. Good luck to you all.

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