What Is a Bitcoin and Why Should You Care?
Raw Power: Huaneng Power (HNP)
In 2002, the Investment Company Institute, the industry group for mutual fund companies, found that just about half (52.7 million or 49.5%) of all U.S. households owned stock in some way. But just 21 million households (fewer than 20%) owned individual stocks outside their 401(k) plans and other mutual funds.
I know that much has changed since 2002, but I'm betting that those figures are still in the ballpark.
And that's because owning mutual funds is easy.
If you own a chunk of a fund that owns a basket of stocks, you don't have to watch the daily movements of stocks and make decisions about buying and selling. (The mutual fund companies certainly work hard enough to discourage you from taking much initiative with your investments.) Plus, if you have a tax-deferred mutual fund, you don't have to consider the tax consequences of capital gains.
Personally, I have the bulk of my retirement savings—what's left of it anyway—in exactly the same kind of mutual funds as most people. They are mostly a legacy from my days with earlier employers, and I mostly just let them be.
But, of course, I also own individual stocks. And I think there are some really good reasons for taking on that role. Here they are.
1) Owning stocks is real.
Facebook, Twitter, YouTube, Second Life, chat rooms, massively multiplayer online role-playing games and every game console joint ever made may be fun, even addictive. But life online doesn't make or lose a thing.
If you own a stock though, you're joined at the wallet to the fortunes of the company that issued it. It's real money, and you can make actual money with it. You can also lose money, but that's part of being real. You can't hit restart (or command/option/escape) and make it go away. Real risk, real opportunity. There's nothing like making a decision and having it lead to real consequences.
2) Owning stocks gives you a chance to test yourself.
It's one thing to watch the markets in a general way. And you may find yourself making some interesting adjustments to your mutual fund allocations during the open enrollment at the end of your company's plan year.
But owning stocks allows you to test yourself against Warren Buffett, Gordon Gekko and Jesse Livermore, the Speculator King.
How good are you at picking the nuggets out of the gravel? Do you have the nerves to wait out a market correction and the gumption to follow a sell discipline? If you're willing to pay for the class, the market will be more than happy to give you exactly the grade you deserve. It can be a humbling experience at times, but also personally rewarding.
3) Owning stocks is fun.
It amazes me all the time that people go to Las Vegas knowing that they're probably going to lose money ... and yet they enjoy themselves. But then that's what huge fountains, famous headline acts and billions of dollars of advertising and fantasy architecture will do for you.
The stock market, on the other hand, just has the boring old ticker. Stocks and indexes go up and they go down. You have to supply the fireworks.
But if you've ever talked to an investor who owns a stock that has just doubled in six weeks, you've probably seen something akin to real joy. (Yeah, I know that it's nothing compared to parenthood, finding true love and sinking a hole in one, but you have to work with me here.)
I also know that it may not be fun if you're desperately playing catch-up, trying to get your retirement funds back up to where they should be so you can quit a job you don't like and head for the ivy-covered cottage in which you hope to live out your years. I'm not saying it's fun for everyone. But for people who prefer investing to woodworking or collecting Pez dispensers, it can be a hugely enjoyable thing to do.
What Is a Bitcoin and Why Should You Care?
Soft news is like junk food for the mind. It’s also a distraction and an annoyance. Imagine what it would be like if the amount of coverage given to any subject was proportional to its actual importance in real-world, practical terms. Suddenly, when you clicked onto Yahoo! or Comcast or any other Web portal, entire armies of soft news stories wouldn’t be there.
Imagine, no little headlines teasing you about which celebrity had what tattoo on which part of his/her body. Imagine a total absence of Lindsay L. stories. Ditto for the K-girls, the Real Housewives, Donald T., Octomom, the young women of the Jersey Shore, the Pregnant Princess and every other reality star, movie star, TV star and flavor-of-the-week gossip magnet. All of them gone. At least gone from the places where you’re trying to find out what’s actually happening in the world. And by that I mean the world in which getting your face seen on the Internet is not the highest human aspiration.
I need to make one thing clear. It’s not that I don’t have any curiosity about celebrity gossip. I have as much of a taste for soft news as I do for junk food. But that doesn’t mean I’m happy about it. I now know more than I ever wanted to about people I don’t know and don’t give a rat’s patoot about. And that’s just from the headlines! Imagine how much of my day could disappear down an intellectual rat-hole if I actually read the stories!
But despite all the useless subjects that have been caught in the spotlight of online celebrity—and I’m including grown men who have an unhealthy fixation on My Little Ponies—the one that I’m actually enjoying is the Bitcoin. The Bitcoin is a synthetic currency, a kind of online money that can be used to make purchases both online and in the real world. It came into being when a group of cypherpunks (people who advocate the use of online cryptography as a way to block government snooping, interference and control) started to take practical steps to create a non-governmental infrastructure for society.
Bitcoins came into being as an idea in 2008 and as a practical reality in 2009. Bitcoins are a virtual currency, worth just as much as people are willing to pay for them. They can be spent online or converted to real-world currency. One exchange doing this conversion says it can “do an exchange from Bitcoins to Liberty Reserve, Perfect Money, Pecunix, Liqpay, HD-Money, OKPay, CashMoney, PayZa, Visa, MasterCard, Paypal, Webmoney, Technocash and Bank Wire.” There is no central bank and no reserve system. Transactions are all public, but the parties to the transaction are anonymous. Bookkeeping is handled by the distributed Bitcoin community. New money is created by people solving electronic problems.
The total amount of Bitcoin in circulation is increasing (it’s now just under 11 million BTC), but the rate of increase is being halved every four years. The amount will reach a maximum of 21 million Bitcoins in 2140 and will be capped permanently at that point.
The thing I find fascinating about the whole Bitcoin movement is that it is a conscious attempt to create an exchange medium that’s completely outside government control. This is a principled act of crypto-anarchy. Its creators realize that it can be used to buy drugs, finance terrorism or for other bad purposes, but believe that the benefits of having a system that exists outside government control is worth the risk. After all, as they point out, “real” money can be used for the same purposes. Privacy, they say, is worth the price.
The price of one BTC was about $35 at the beginning of March, but skyrocketed to above $90 as the financial uncertainty caused by the Cyprus Crisis peaked. This is obviously a bubble situation, but the market will rein that back in soon.
If you’re tempted to own some Bitcoin, it’s certainly possible. Probably not a good idea, but it will make great conversation at parties and raise your hipness level. Just don’t bet the digital ranch on making any money.
For making money, I think you’d do much better finding a Cabot investing newsletter that aligns with your investing goals and style. You can find a tool on the Cabot website that will help you with that.
There’s nothing cypherpunk about Cabot newsletters. They’re rooted in the real world, with decades of experience built in practical, usable recommendations. Find out more by clicking here.
For my stock pick today, I’m consciously getting as far from the digital world as I can. There’s nothing virtual about Huaneng Power (HNP), the Chinese energy giant that turns coal into electricity. And with 48 power plants in 19 Chinese provinces and 1 in Singapore, the company burns a lot of coal.
With a market cap of over $15 billion and annual sales of over $21 billion, Huaneng Power is a big player in the Chinese energy picture. While the government would like to move toward renewable sources like wind and solar power, the enormous demand for increasing amounts of electricity (and the huge reserves of coal in China) make it a practical necessity to use what’s available.
Huaneng has an active program to mitigate its impact on air pollution, including the first-in-the-world generating plant to use seawater as a desulfurization agent. The company’s new plants also use super-critical combustion technology to increase efficiency and reduce CO2 emissions. But for now, the big story for Huaneng is its buying power for coal and its active program of new plant construction.
The company’s earnings per share have gone from about $1.25 five quarters ago to $2.73 in the latest quarter. The stock also pays a small dividend (0.6% forward annual yield). But the most impressive thing about Huaneng Power in many ways is its stock chart. HNP bottomed at 15 in October 2011 and has climbed steadily as earnings have improved. HNP is now trading above 43, and looks to have more coal for its boilers.
This is a thinly traded stock (just 63,000 shares per day on average) so volatility is potentially high. Short interest is at a reasonable 3.5 days of trading, which is neither threatening nor a short-covering opportunity. HNP is a good play on the global demand for electrical power in general and the still-robust growth of China in particular. I think it's buyable on a pullback to 41. A drop to 38 would be bearish.
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report