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Wednesday, May 10, 2006

WHY INVEST IN APPLES OR INDIA?

Clients and friends snickered last year when I answered their questions about good investments. "My investment strategy is simple" I invariably respond. "I put my money where all the rest of the money is going. I look at where other investors are spending and where consumers are spending. I walk through shopping centers and malls and look at where the customers are. I walk through new computer data centers at all kinds of corporations, looking at the names of the new equipment. I look at what all the young people are wearing. I see older people buying medicines and surgical procedures. Everybody seems to be refinancing homes."

I look at where I have wisely spent my money recently. What did I buy that turned out to help me the most in my work and daily life? What products did I return because they failed to serve my needs?

Who is providing these products and services? Where were these products manufactured? What corporations, banks, and employees are profiting when consumers make these spending decisions?

The answers to these questions are easy to find. People of all ages are shopping at JCPenney, Apple Computer Stores, and Old Navy (owned by Gap, Inc.). All kinds of people are buying and selling on eBay. In drugstores and hospitals, people are dropping serious cash on Johnson and Johnson products. Banks like Bank of America are profiting from loan and credit card interest.

The new equipment in corporate computer centers is often storage equipment, made by Network Appliances and EMC, among others. I realize most people cannot go where I am permitted to go but the equipment sales figures are available to anyone who cares to look at them. Most small business owners and many homes are using DSL service provided by firms like Verizon. Other companies are buying up network capacity in fiber optic networks like those operated by Level 3. Check out the profit margins at any business you think might be a good investment.

I see people talking on cell phones everywhere I go. There are many competing services but Sprint/Nextel, Verizon, and Cingular sure seem have some serious market share.

Sure people are spending on things like gasoline and groceries but are there serious profit margins for the retailers of those services? I bought some energy firms last year and sold them after they grew enough to meet my needs.

Looking beyond the obvious, I ask who is really manufacturing the cloth, plastic, medicines, software, and electronics that are necessary for all of the products and services I see being consumed. My research takes me to places in Asia, including China, India, and the nations of southeast Asia.

Finally, I ask what countries are enjoying significant economic growth, if not actual widespread prosperity. In addition to India, my research lands me in places like Brazil, Singapore, Venezuela, and Colombia. Where are the employees in those places saving their money? Where are they spending money?

In some cases, I choose to let experts at mutual funds or exchange-traded funds help with those decisions. I look to see how much they are going to charge me in expenses to manage my investments in places like Brazil and India. This is how I found certain India funds and T. Rowe Price mutual funds.

Some of my research turns up investments that are already priced to reflect the market demands. Oil company stocks or the stocks of certain retailers, like JCPenney, are already priced high. Some of the phone company stocks seem too expensive. I do look closely at the price to earnings ratio (P/E) for each prospective investment, but I also consider other, less tangible factors as well.

Right now, Apple Computer is probably near an upper limit, but who really knows? What if the Beatles suddenly agree to sell their songs through iTunes? Have you seen people wearing little white headphones when you ride on a bus, train, or airplane? They are listening to iPods in most cases. What if people suddenly discover that MAC computers are far less likely to get a computer virus? I bought my AAPL stock years ago after learning about how MAC computer graphic performance and reliability exceeds the Intel-based PC. Everyone was buying digital cameras at that time. Now the best of both computer platforms is being offered by who else but Apple Computer?

Speaking of virus', what companies do research and make anti-viral or cancer medicines? Are there any drug companies with promising research and low stock prices? Peregrine Pharmaceuticals jumped out at me.

I do not recommend you make the same investments as I have. I made my choices at a certain time in the past, when the decision was right. I make a decision to invest expecting it to do well for at least a year. I prefer to pay only long term capital gains taxes, not the much higher short term tax rates. If I invest for the long term, the stock or mutual fund investment must pay me significant dividends for using my money.

Think about my reasons for making the investments I make. Look around the world, look at where people are spending money. Look beyond the borders of the country where you live. Go out there and live your life, but take note of what you see going on around you. Investing is not as difficult as the banks and investment firms want you to believe.

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