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HOlmes Osborne

    March 2014 - Osborne Investments Tenth Anniversary

  This coming March, we will be celebrating our tenth anniversary. We have seen a ot of interesting things happen over that time: the real estate bubble, rise in old, the stock market crash, low interest rates. Navigating these financial markets has been a challenge.

We are happy to outlive erstwhile investment houses such as: Merrill Lynch, Bear Stearns, Lehman Brothers, Washington Mutual, AIG, and Wachovia to name just a few. Sure, some of these companies are still around but are merely divisions of
other corporations.

Our goal was always to provide something different than what traditional money managers could offer. We have certainly achieved that. Where else can you find small stocks, foreign stocks, precious metals, and bonds, all in the same portfolio?

What has this allowed us to do? Protect investor capital. People have already forgotten the 2009 market crash. Not us. We still remember how “safe”
investors lost most of their money. We have provided downside protection by not merely reading the label but understanding how investments work.

    Harmony Gold

  We initiated a position in Harmony Gold in December at a price of around $2.50 a share. Harmony has had nothing but bad news over the last ten years and is tradingat a multi-year low. So why buy? $2 stocks are a great way to make money and Harmony has very little debt and will probably stay in business for a long time. It takes a lotless for a little $2 stock to double than an $80 stock. All great stock investors have made fortunes in low priced stocks. Let’s hope we can do the same.

    Inflation

  Everything that I read states that inflation has remained low. I don’t believe it. Why? Personal experience.

Over the holidays, my family and I visited several places that I have frequented in the past. First, Jen and I traveled to California’s central coast and sampled two wineries. Most bottles started at $40. Just a few years ago they were $25.

At the Getty Museum, it costs $15 per car to park. Granted, that’s a pretty good deal but substantially more than it cost to get in 10 years ago. As a matter of fact, they used to have a bus that picked you up next to UCLA’s baseball field. I think it was free.

When I saw the movie American Hustle at the Century City Mall, the cost was $12.50 PLUS $4 for parking. Great movie, not worth $16.50. Just a few years ago, you could park for no cost if you validated. Same thing with the Promenade in Santa Monica. I paid $1 and was there not very long.

Maybe I sound like a cranky old man but prices have risen. Why? When the Federal Reserve introduces trillions of dollars into the economy the price of goods and services rise. I don’t care what anybody says, it’s the truth. How did inflation slip into these businesses? Labor, the cost of oil and energy, raw building materials, food, who knows? There are too many variables to follow– just the outcome.

How does an investor protect himself? Buy assets. Stocks, real estate, commodities, farmland, paintings, collectibles, etc. As long as the afformentioned are not in a bubble, they will rise with inflation.

    Orkla

  Norwegian food maker Orkla is another addition to our portfolios in the latest quarter. Orkla is the largest purveyor of foods in Scandanavia. Americans should think of this company as a cross between Proctor & Gamble and Nestle.

It sports over a 5% dividend yield and is financially sound.

Orkla is converting from a conglomerate and focusing on food. Fans of this company believe that when the market recognizes this, the stock will rise. Orkla has a market cap of 48.4 billion kroner ($7.74 billion) and had a free cash
flow yield, based on 2012. If this were an American company, it would probably trade 80% higher.

Investments like Orkla are hard to find in the US. So many of our stocks have millions of eyeballs looking at them and makes it hard to find a good deal.


    Investing Styles of Osborne Global

  Our firm has a few different styles that we’ve developed over the last ten years. The first is value. This is looking at a firm’s cash flows, assets, and debt and determining if the stock is “cheap”. An example of a success is when we bought BP after the explosion in the Gulf of Mexico four years ago. Since then, we are up about 45%, including dividends. The challenge is to have the emotional fortitude to invest when others are fleeing.

The second style leans towards growth companies. An example would be Heineken Holdings. We bought Heineken a few years ago when the economy in Europe looked bad. The stock wasn’t particularly cheap, trading at a price to earnings ratio of 12 and a dividend yield of 2%. However, the company had been growing sales year after year, has a product that is easy to understand, and does not dilute existing share holders by offering new shares. This idea paid off and we are up over 50% with dividends.

The third style is to profit from inflation. Central banks around the world are increasing their money supply at a drastic rate. Critics would say investments like gold and platinum produce no cash flow and are impossible to evaluate. To some extent, they are right. As a matter of fact, these investments performed poorly in 2013 for us. But we predict good things when inflation becomes evident.

The last style is low priced stocks. These are $2 stocks and are quite volatile. It doesn’t take a lot to make money or lose money in these. Harmony Gold Mining is an example.


    Fixed Income

  Our fixed income accounts are doing well. Not much to write about these but boring is good. They yield in the 3% range and our firm’s fees are quite low, making sure that our clients are getting a good rate of return on their money.

This has become half of our business. Clients come to us wanting to earn a little more than what banks have to offer. We invest their money in short term corporate bonds and everyone seems happy. We do have to explain how bonds work to some folks. Alcoa, Arrow Electronics, Case New Holland Tractors, Dish Networks, and Southwest Airlines are a few names we own.

I wonder when interest rates will rise? I’ve been calling for it in this very newsletter for a long time AND HAVE BEEN WRONG! Still, these individual bonds will do well because we are holding them until they mature in just a few years.



HOlmes Osborne

    April 2013

  Holmes Osborne was recently mentioned in the Wall Street Journal. The best money managers know when to give financial planning advice to help clients reach their financial goals, and this article tells the story of how Mr. Osborne helped a client avoid a costly mistake by offering some free advice.

Click here to read "Speaking Up to Prevent a Client's Mistake" by Zack Anchors

The full WSJ lik can also be viewed here:

http://online.wsj.com/article/SB10001424127887323741004578414390413057004.html






    January 2013

  The US markets had another good year as the rebound from 2009 continues. My guess is at some point the rebound will end, and the market will take a drop. Not a crash per se, but a pull-back.

Our gold miners and oil drillers lagged in 2012 but have done very well in 2013. Oil has stayed above $90.

As in the past, our bonds and fixed income have done quite well for our conservative portfolios. We are still finding corporate bonds that yield above 3% which beats the heck out of what the banks are paying.

Aren’t you glad the elections are over? It’s hard to believe that the news is already talking about who may be running in the 2016 election. Let’s concentrate on the next four years, not the next elections!

I predict over the next ten years the American stock market will show a modest annual increase — probably around 3% a year on average. Earnings have been strong since 2010 but earnings, like everything else in our economy, are cyclical. Eventually, corporate profits should weaken.





  Global Concentrated Hedge Fund

  We are in the process of starting a hedge fund named “Global Concentrated”. The fund is based upon my personal IRA and is a high risk, high reward investment.

A dollar invested in my IRA in 2008 had grown in five years to almost $4 by the end of 2012. A dollar in the S&P 500 over the same time frame would have shrank to 80 cents. Bear in mind, this was accomplished by holding single positions, selling out of the market in 2008, and buying gold in 2009. All high risk/reward.



  Trading in accounts


  We have begun a new strategy for our growth accounts. Now, we are trading some positions more actively. These are not long term investments.

Because our firm is so small, we can quickly get into and out of stocks while other firms can’t because of their size. For example, a mutual fund that manages billions of dollars can't easily trade a stock without affecting the price of the stock. However, we can because of our smaller size.

Another example is a trade that we made a few weeks ago buying Freeport McMoran. Freeport is one of the largest gold and copper miners in the world. Management decided to buy two energy producers. The market was unsure of this news and the stock dropped from $38 to $31 in just a few days.

As the stock was rising, we bought shares. Our clients made up to 7% profit in just a short amount of time. Don’t get me wrong, we could have lost money in this investment just like any other stock. However, we would have sold to mitigate losses.

Another short term trade is Alcatel-Lucent. I’m sure that you have heard of Lucent, formerly Bell Labs. This is one of the many companies that so many people lost fortunes during the internet boom of the 1990s. Now, the stock trades at $1.60.

Although Lucent has been bleeding cash, it still has assets around the world. Such a low price should mitigate much of the risk. Of course if we’re wrong, we won’t stay with this investment. Our accounts have stop-losses which order a stock to be sold after a certain point.



  Ninth Year in business this March


  It’s been nine years since I put out my shingle. We’ve survived a market crash and outlasted many erstwhile blue chip investment companies including Merrill Lynch, Lehman Brothers, and Bear Stearns. When I say that we’ve outlasted these companies, they still exist but under completely different ownership and management.

What’s our secret? We don’t follow the crowd. We are not always fully invested nor are we afraid to sell out of an investment that is losing us money. Had the other investment houses done this, they’d still be in business.

What does the future hold? We don’t know. However, we will continue with our strategy as it has worked in the past.

I can tell that the American stock market and real estate markets have seen their best days. There will be slower growth ahead. We will hunt and peck around for ways to make our clients greater returns on their money while taking less risk than Wall Street.



  Profits in Altria and Berkshire Hathaway


  We decided to sell our Altria and Berkshire Hathaway. Altria’s cash flows have flattened out over the last few years and the company has had to borrow to keep up its dividend. This is not a place that a corporation wants to be in. When we bought Altria, it had a 6% yield. Counting the dividend, we made about 42%. Not bad.

We sold our Berkshire Hathaway in part because we are concerned that the American stock market may take a substantial drop because it has more than doubled over the last four years. Though Berkshire is one of the best companies in the world, it would be affected by the overall market.

We made about a 27% rate of return in the stock. I’ve considered attending the Annual Shareholders’ Meeting this spring in Omaha.



  Have you done a will or trust?


  It always amazes me the number of people whom I’ve met who have not done a will or trust. Do you have any idea what happens to your assets if you die without a will? They go to probate court. Then, your heirs must petition the court. All of this takes time and incurs attorney fees. And what happens in court, doesn’t stay in court. It becomes public information.

When was the last time that you updated your will? Have your assets changed? What about arrangements with heirs?

The new estate tax rate is $5.12 million per spouse. So a couple can exclude up to $10.24 million before the estate tax kicks in at 40%. Qualified money such as IRAs, 401Ks, and the gains in annuities is taxed at the heirs’ tax rate. As the Bible says, render unto Caesar what belongs to Caesar.



  New tax laws in a nutshell


  If a couple makes over $250,000, they will pay an additional 3.8% for the Affordable Health Care Act plus 0.9% on Medicare wages. Couples making $450,000 will see the old 39.6% rate and incur capital gains of 20%, up from 15%. The 3.8% is also added to capital gains. The 15% capital gains rate stays the same for couples under $450K.

Exemption amounts on the Alternative Min. Tax have been raised to $78,750. The payroll tax for FICA will go back to 6.2%. Let’s hope that our country can get to a point where it takes in more taxes than it pays out in expenditures!

 

holmesosborne@holmesosborne.com


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