How to Turn Sea Water into Cash
(How to build a maritime holdings portfolio)
"Those who go to sea for pleasure would go to Hell on a lark."
Can you answer "yes" to following questions?
Do you have an infinite time horizon like God or a pension fund?
Do you have high tolerance for financial risk and volatility?
Do you feel lucky?
Do you have a securities broker or on-line discount brokerage account?
Do you have "the patience of Job?"
Are you willing to diversify into "foreign" (non-USA) stocks?
Are you willing to diversify into small cap equities?
Are you willing to endure criticism and censure from assorted folks and political interest groups who think you are evil? Asked any good Baptist's way: "Are you baptized and washed in the Blood of the Lamb?"
Do you wholly recognize that past performance is no guarantee of future results?
Can you tread water in open ocean?
If you can't answer "yes" to 80% of these questions, you probably shouldn't invest in maritime holdings unless they are no more than 20% of your portfolio, even IF "Risky Business" is your favorite coming of age movie.
2018 Example: Initial Investment of $12,000 you can afford to lose (Perdido!)
Consider the following table of a small hypothetical initial investment portfolio based upon "real" 2018 data. This is for EXAMPLE only and does not constitute either advice or a financial recommendation. One might be tempted to toss all eggs into one basket and chase that 98% expected yield. That greedy choice would be a huge mistake. Or, one might be more cautious and invest in lower risk stocks such as EURN or KMI. This is not a terrible choice, but it's not diversified enough. In our humble opinion, we believe a minimum of 5 - 10 different securities are required to diversify within a business sector. Your experience may vary. In this example, inclusion of KMI adds some sector diversification because it includes pipelines and other oil and gas holdings. We achieve additional sector diversification by selecting across the shipping spectrum: oil, gas, bulk trade goods, leasing,and operations. NOTE: ONE DOES STILL NOT HAVE A DIVERSIFED PORTFOLIO BECAUSE IT REPRESENTS ONLY ABOUT 4 or 5 BUSINESS ENTERPRISES WITHIN THE MARITIME SECTOR.
PURCHASE STOCK CURRENT ANALYSTS' Expected CURRENT TOTAL
QUANTITY SYMBOL PRICE 1 Yr. TARGET PROFIT DIV YIELD % INVESTMENT Annual Cap Annual Total Expected
per share price per share per share per share Gain/Loss Income Gain R.O.I.
400 SSW $7.06 $7.25 $0.19 6.81% $2,824.00 $ 76 $192 $ 268 9.50%
1200 NAT $2.20 $4.24 $2.04 5.41% $2,640.00 $2,448 $143 $2,591 98.14%
300 NAP $10.10 $9.30 -$0.80 16.72% $3,030.00 -$ 240 $507 $ 267 8.80%
100 KMI $17.50 $22.29 $4.79 2.86% $1,750.00 $ 479 $ 50 $ 529 30.23%
200 EURN $8.80 $10.07 $1.27 1.42% $1,760.00 $ 254 $ 25 $ 279 15.85%
TOTALS $12,004.00 $3,017 $916 $3,933 32.77%
Assumes no purchase or sales transaction cost
"In our view, rising global trade set against a backdrop of protectionism fears shows the gap between sentiment and reality is wide—fuel for continued bull market." - Fisher Investments Editorial Staff.
The next thing to observe is that we are financially and emotionally "indifferent" to whether annual profits/losses are made through capital gains/losses or dividends; we do prefer a combination of both. Note that one of our selected stocks in the example is expected to decline in value! The dividends and eventual capital gains are taxable unless they occur within a tax-sheltered investment environment such as a ROTH I.R.A. Also please note that these stocks are held wholly without leverage (margin or other borrowing) because (a) they are already risky (b) the companies themselves are highly leveraged! As a shareholder, you've already borrowed a bundle to help company management to finance that $185 million LNG super-tanker!
On the best of all possible planets, the expected 32% return on investment is beyond inviting - it's seductive as a Perdido Isle Siren or a Nereid. If that return exactly held up for 15 years, a $12,000 reinvested would turn into $625,000 with no additional capital added!
But realistically, we make conservative assumption that capital gains are only slightly above flatline - about 2.5% per year -and because of our risky place on the yield curve, dividends will average about 5.5%. That achieves the 7.5% - 8% target return required by most pension funds with an infinite time horizon, but lacking a pension funds huge level of diversification and opportunities not available to most investors. Under this assumption (after year 1), our $12,000 investment turns into "only"$45,000. Still, a budding pelagic capitalist has more than quadrupled the fund and probably out-paced inflation and might possibly survive a friendly tax-collector. If one were bold enough to inject an additional $5000.00 per year into the example portfolio, the scenario's outcome grows to $167,000 in 15 years.
The Motley Fool asks: "Can you survive a market crash? " Do you have a "long runway?" The fool's advice: make sure you have enough cash out of the stock market to last for the next five years. It's devastating to have to sell stocks to raise cash after a market crash. We don't recommend the use of margin accounts, and if you use them, we recommend closing them: During a correction, a margin call would probably force you to sell otherwise healthy positions to raise cash at precisely the worst time.
Finally, just remember important principles known to all experienced sailors:
"A boat is a hole in the water into which you pour $money."
"A ship is a means of traveling slowly at great expense."
Murphy (of Murphy's Law fame), not Britannia, rules the waves.
Water does not extinguish The Second Law of Thermodynamics.