# The Most Powerful Force in the Universe

E = mc²

Albert Einstein

Mass energy equivalence paved the way for our most powerful weapon and energy source. Nuclear force was not, however, the most powerful force in the universe according to this man. Instead, it was compound interest.

Einstein was a man of relativity, and while it is true that nuclear is the strongest type of force taught in the classroom, in the real world his statement makes a lot of sense. The top 1% of income earners will make much of their income off of investments, and these investments typically yield a certain percent of profit per year which is then applied back upon itself the next year. This is one way in which income inequality grows – because the lower wage earners do not put their money in compounding investments.

It is important for anyone looking to get the highest return on their investment to understand the basics of compound interest.

Rule of 72

For those that don’t want to pull out a calculator to find out how long their investments will double in size there is a helpful and speedy way of figuring out roughly how long it will take to double their money. Divide 72 by the interest rate and that will be the number of years a annually compounding investment will take to double. See examples below:

9% interest – 72/9 = 8 years

5% interest – 72/9 = 14.4 years

3% interest – 72/3 = 24 years

If you use outrageously small or large interest rates the rule of 72 starts to break. Obviously a 100% interest rate will double your money in just 1 year, not eight and a half months!

Compound Interest Formula

The mathematical formula for annually compounded interest is

# FV = PV * (1 + i)ᵗ

Where FV is future value, PV is present value, i is the interest rate, and t is the number of years. As most readers know, this is an exponential function of time (See Figure Below).

Solid line is exponential function with lower constant value.

As you can see, exponential values can quickly get out of hand. Other real world examples of exponential growth include population growth in developing countries, inflations affect on currency (exponential decrease in value as seen below).

How inflation eats away

The phenomenon known as the rising income gap comes largely from these two graphs. The top graph represents invested wealth and the bottom represents buying power of a single unit of a depreciating currency.

What do I do?

If you’ve read to this point then you’ve already taken a good first step – you’re searching for knowledge and exponentially growing your financial acuity rather then let your mind exponentially waste away. I suggest creating a financial plan which takes into account your age (time till retirement), risk tolerance, and net worth and allocate uninvested funds into investment accounts. Investments can range from stocks, bonds, real estate, and even high interest savings accounts. Keep in mind that these days interest rates are amongst the lowest in mankind’s history, in the United States in particular. Most of all, don’t panic!

# How To Prospectus Hunt For Stocks

Some investors are clueless when it comes to investing in stocks per industry. There is a way to take out a lot of the hassle of opening financial reports and studying the growth patters of companies – have someone else do it for you! You can hire a portfolio manager or you can buy ETFs which manage a portfolio in your desired sector for you. Another, cheaper, alternative is to simply Prospectus Hunt.

I will be using PHO as my example today – PHO is a water industries based ETF which according to their description:

PowerShares Water Resources Portfolio (the Fund) seeks investment results that generally correspond to the price yield of the NASDAQ OMX US Water Index (the Underlying Index). The Fund generally will invest at least 90% of its total assets in common stocks that comprise the Underlying Index. The Underlying Index seeks to track the performance of the United States exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries. The Fund invests in the sector such, such as industrials, utilities, healthcare, information technology and materials. Its investment advisor is Invesco PowerShares Capital Management LLC. [1]

Creating products that are designed to conserve and purify water sounds like a pretty noble and lucrative business. I want to take part. The easiest thing to do is obviously to invest in PHO, however if you read their prospectus closely you will notice an “expense ratio” of 0.61%. This is actually a bit higher than the industry average expense ratio of 0.44% for ETFs, and a bit lower than the standard 0.74% expense ratio for index funds. For those who don’t know what expense ratio is:

Expense ratio is the percent amount of your holding that will go towards the fund manager every year. For example if you have \$1,000 in an ETF with an expense ratio of 0.61% then you’re going to be paying \$6.10 every year to the managers of the fund. Most funds have their holdings listed publicly on their website – Currently PHO has the following as their top stock holdings:

• WAT      Waters Corp
• ROP       Roper Industries Inc
• PLL        Pall Corp
• PNR       Pentair PLC
• FLS         Flowserve Corp
• MWA      Mueller Water Products Inc
• ITRI        Itron Inc
• WTS        Watts Water Technologies Inc
• TTC         Toro Co/The
• WTR        Aqua America Inc

Now that you have a nice list at your disposal the only thing left is to pick a few of these stocks to invest in. Look for standard things, like P/E ratio, growth, current events that make the company appetizing and go for it! Doing this will usually leave your investments more volatile as you will have less diversity but eliminate the expense ratio for each year and enable you more control over your investment make-up.

If you’re interested in different types of ETFs a have a few that you can pick from below:

• USO (Oil)
• PPA (Aerospace and Defense)
• IDU (Utilities)
• GLD (Gold – keep in mind that ETFs may not hold stocks but may instead hold physical commodities such as gold)
• SLV (Silver)

Good hunting.

References:

[1] Invesco Distributors, Inc. “Product Details.” PHO – PowerShares Water Resources Portfolio. Invesco Distributors, Inc., n.d. Web. 16 Apr. 2015.

# What Explains the Chinese Stock Market Price Boom?

The Chinese stock market boom has been scrutinized by the US mainstream media for it’s rapid ascendance. You will hear people mentioning that high school dropouts are now investing in large numbers without understanding the basic fundamentals of companies including but not limited to earnings. The Hang Seng (Hong Kong’s Market) has risen 60% this year having been opened up to sell shares to Chinese investors.

In all reality, small scale investors make up a small portion of actual market volume – and while it’s true that a large number of them are trying to get in on the action, the real reason for this steep rise is a law change which hampered real estate investment tactics. This included increasing the minimum down payment on a second property to 20% and increasing the capital gains tax on property sales to 20%. If you’ve lived in Asia you will find out that Chinese investors are big into real estate – and this spreads beyond China and Hong Kong into other ASEAN countries including Australia and New Zealand. Even less educated folks know the value of owning property, and many of them have been fortunate to make a reasonable amount of money in the past few decades as China has progressed to claim the world’s #2 spot economically speaking.

Stack the new property restrictions with two interest rate cuts by the central bank and a specter of a stimulus package down the road and you have the perfect environment for a stock market to flourish. This is similar to how the US stock market has reacted in the past few years to the Federal Reserve stimulus packages and extended periods of historically low interest rates.

Just this week, the Hang Seng market value rose above Japan’s Nikkei – an amazing feat but not unexpected given their market getting opened to Chinese mainland investors. Japan continues to stagnate as its fundamentals and workforce are burdened by a low growth rate and near zero immigration (due to strict immigration laws). The one bright side to the economy these days is higher tourism due to a stronger dollar against the Yen.

Some imagine the Chinese and Hong Kong bull markets will continue for awhile until free cash flow diminishes. Others are more skeptical, including most US pundits – they envision a large correction. I can foresee a huge catastrophe if the tax laws are changed regarding Chinese capital gains tax on stocks, but given the new restrictions on real estate trading this isn’t completely out of the question.

In hindsight, an American investor could have made a fair amount if he/she invested in Matthews China Fund Investor Class (MUTF:MCHFX), which has gone up 20.17% Year To Date. This fund specifically zoned in on Chinese stocks has outperformed one of the best American stocks Apple (Apple has gained 12.96% year to date) and NASDAQ (A piddly 4.57%). Investors can also consider investing in a broad array of Asian dividend stocks using the Matthews Asia Dividend Fund Investor Class (MUTF:MAPIX) which has gone up 12.95% YTD.

It goes without saying that the one who thinks there’s a serious bubble can always short these types of securities, but this is EXTREMELY risky. There is still more free cash flow as a percentage of the stock market capitalization in China than the US, meaning that they can pump a lot more money into the stock market before running short on liquidity. My expectation is that if the Chinese stock market is reaching bubble capacity and collapses, it’s quite likely to impact the US stock market. Even from a psychological perspective, seeing a bubbled stock market pop may cause people to rethink their investments.

# Investing in Silver

Silver is a pretty common metal in the world – it has many industrial uses due to its highly conductive and reflective properties. In fact, silver is the most thermally conductive element!

Silver also has a lustrous quality, until of course it oxidizes – this phenomenon is called tarnishing.

Silver has been used in coinage since at least 700 BC, when the Lydians used a naturally occurring silver-gold alloy to mint these coins. Concurrently, the Chinese also used silver in their coinage.

Today, silver can be invested in directly through the purchase of silver coins or bars which can be classified into bullion, collectibles, and antiques. Bullion is silver stored in a very simple form like a plain bar with a simple seal of the minting company on top. Collectible silver coins can include nationally minted coinage such as the US American Eagle, the Canadian Maple Leaf, or the Chinese Panda. These nationally minted coins are more valuable than bullion because they are easier to recognize and differentiate between genuine and fake products. That being said, the only true way to test silver is to perform an acid test, as today there are very skilled copycats which use lead and other inferior materials to create realistic looking fakes.

If you are going to invest in silver, make sure you are buying from reputable sources – I would not encourage buying from an online store that does not sell large quantities. I would also stay away from vendors on the street anywhere in the world – ensure that your seller has a brick and mortar business if you are going to buy face to face. Also, make sure not to buy silver that is overpriced – Bullion should not be selling for more than 5 percent more than the “strike price”. Strike price means the current world market price. In some countries, however, it’s hard to get around paying a large premium if the government imposes high import taxes on such goods. India, for example, has a huge import tax on gold and silver.

Silver bullion is usually sold in 1, 5, and 10 ounce pieces. This makes future transactions much easier.

If you are interested in buying collectibles, then you are effectively buying an insured piece of history. This is similar to buying collectible coins but for the vast majority of historical coins the silver/gold ones carry a much higher premium. For example, a simple old Roman coin might cost you \$50-\$100. A silver Roman coin will run you more like \$250-\$1000. I can’t claim to be an expert on the value of historical coins, but these types of investments can be a lot more risky than investing in simple bullion.

Historically, silver is not a good investment as compared to stocks or bonds. Silver will not pay you interest, it does not work to create earnings, and requires the cost of storage. However, under certain circumstances most recently the stock market crash of 2009 investing in silver or gold until the stocks dipped by 50 percent was a damn good deal.