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~ Dollars, Sense, and Probabilities.

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Monthly Archives: November 2015

As Paris Meeting Approaches, Climate Change Movement Shows Its Lack of Seriousness

17 Tuesday Nov 2015

Posted by JC in Uncategorized

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Climate Change, COP21

I am not a Climate Change denier. There is some evidence that, all else equal, human activity may contribute at the margin to a very gradual increase in the Earth’s average temperature. However, that doesn’t mean that it will cause a cataclysm, that it is the biggest problem facing the world, or that an infinite price should be paid to halt or reverse it. The inability or unwillingness to put it in proper perspective, do sensible cost/benefit analysis, and seek realistic solutions is what keeps the Climate Change Movement from being a force for good.

The fundamental fact of human existence is that our wants are infinite and our resources are limited. I believe in spending reasonable sums for research and development on solar and other technological improvements that may solve the problem or help manage the consequences at an acceptable cost to humanity.

But as this peer reviewed paper by Bjorn Lomborg shows using the standard MAGICC Climate Model, the current prescriptions of the Climate Change Movement call for the world to spend on the order of $85 TRILLION through 2100, with an effect of only 0.17 degrees Celsius. This is almost zero progress for an incredible cost, while hundreds of millions of people in the world are starving, lack basic sanitation, and don’t have access to electricity.

What a stunning thing that such a group of people with collectively high IQs can be so blinded to common sense. Something tells me that incentive-caused bias (promoting the view that will keep their research budgets well-funded) is not limited to those pushing fossil fuels. Not to mention the profiteering by Al Gore and friends which by some accounts has him approaching billionaire status.

It is the responsibility of sensible people in the scientific community to think outside the box and work to create technological solutions to the problem. Not to demand a gigantic and pointless penance from humanity which cannot even properly feed and clothe all of its members.

See also:

Gambling the World Economy on Climate

Impact of Current Climate Proposals

The Tyranny of a Big Idea: The Attraction of the Secular Mind to the Politics of Impending Apocalypse

Capitalism Makes You Cleaner

Is Climate Science Really Settled?

The Scientific Method and Climate Change

Income vs. Total Return? I Want Both!

16 Monday Nov 2015

Posted by JC in Uncategorized

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Income Investing, Investing, Total Return

Ignore The False Dichotomy

If you want a topic to start a flame war on a finance blog, Income vs. Total Return is almost as good as Active vs. Passive. But like the latter, the former is a false dichotomy. Why choose between them when you can have both?

In honor of Morningstar’s Income Investing Week, Christine Benz has posted an article on the importance of avoiding this false choice.

While I think it is fair to say that Christine hews to a relatively more income agnostic approach than I do, I certainly appreciate her point that you can’t afford to ignore total return when investing for income. We each need to draw the line for ourselves, but this is a useful framework for figuring out our own individual emphases.

But first, let’s take a look at the 2 solo approaches.

The Income-Agnostic Total Return Approach

This approach means that you plan on selling off part of your portfolio each year when you are in retirement/drawdown mode. The upside is that you can potentially have higher returns. The downside is that you may get killed selling into a downturn by dollar-cost averaging in reverse. This is very painful in a down market.

This can be alleviated somewhat by having a substantial allocation to bonds, but in my opinion the bond market as currently priced represents return-free risk. Bonds may not be correlated with stocks, but if the long-term returns stink, you might as well just use cash as a sandbag. If stocks are a bit overvalued, and I think they are, then bonds in general are screamingly expensive, unless we are in for 20 years like Japan after 1990.

The Total-Return-Agnostic Income Approach

There are those who invest only in the highest yields and don’t care about total return. Some of those folks are currently holding Kinder Morgan (KMI). They tell themselves that the price doesn’t matter because they are never going to sell it, they plan on just living off of their dividends.

But what if the dividend isn’t sustainable? With high leverage and 10-20% of cash flows coming from oil production, Kinder looks a bit iffy. They have already reduced their dividend growth projection from 10% per year to 6-10% a year. I have a hard time seeing how they will meet this goal without an oil price recovery.

As an income investor, you need to look very carefully at the business model to make sure it is in a defensive business whose cash flows will support the dividend even in a downturn. You definitely don’t want to be the last one out the door after a dividend cut on a stock like this.

The Best of Both Worlds: Income and Total Return

Which brings me to the sweetspot: substantial yields from defensive businesses that can grow their dividends at a good clip. The archetype is a 3% yielding stock that can grow 7% per year. Or a 5% yielder that can grow 5% per year. Bought at a fair price, such a stock should have a long-term total-return profile on the order of 10%. That should be competitive with the S&P 500 over a full market cycle.

10% total-return profiles from stocks with already substantial dividends are currently difficult, but not impossible, to find. But this general approach should generate good long-term returns at lower volatility than an index fund.

And the practical benefits of this strategy are a stable and growing annuity-like stream of dividends which you can potentially live off of, and that should keep you protected from inflation. It becomes easy to answer the question: When can I retire? When your dividend income is large enough to cover your expenses.

Now, this approach isn’t for everyone, as individual stock risk means you have to more actively monitor and manage your portfolio than an index fund investor, but the rewards can be very practical and solve much of the puzzle of how to turn your portfolio into a stream of income for retirement.

See also:

Morningstar’s Income Investing Week

Dwelling on Quality

McCormick Spice – Almost Perfect

The Power of Dividends

Berkshire Hathaway’s Latest 13F

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