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Larry: |
I am bullish again now that the market is recovering, and many big companies are selling at lower Price/Earnings Ratios again. |
| Barry: | You mean that P/E’s, or the number of years that a company’s current reported Earnings Per Share (EPS) will take to equal the current price of the stock is down to 20 or less? |
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Larry: |
Yes, but the reason to invest in those stocks is the assumption that the EPS will significantly increase over the coming years. |
| Barry: | And I assume that you are prepared for the price of the stock to decline significantly if the EPS do not increase? |
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Larry: |
Sure, but it won’t decline too much due to the dividend yield, and they have a record of increasing the amount paid in dividends. |
| Barry: | So, you are betting that the per-share dividend will continue to be paid even if the EPS is lower? You do agree that if the EPS declines that it is likely the amount of dividend declarations will also decline, and if so the price of the stock will decline? |
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Larry: |
You are always looking at the downside, and I believe that everything is going to be great again in this country. I am betting that we will solve the problems relating to the international and domestic political situation, China, Russia, racial issues, inflation, gun control, qualified labor availability and women’s rights issues, among others. |
| Barry: | I hope that you are correct, even though it is probably going to require significantly higher state and federal taxes to pay for all the new government programs, not to mention our aging and under-educated population. |
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Larry: |
I have the funds available to invest and don’t want to buy bonds or an annuity, so I want to try to make money by trading stocks. |
| Barry: | That is understandable, but have you considered letting a professional investor invest for you? |
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Larry: |
You mean by buying mutual funds or ETFs |
| Barry: | Yes, exactly, and if you want more excitement, you can get leverage by buying them on margin, if you don’t mind the added risk and payment of interest on the borrowed amount. |
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Larry: |
You are right, I can buy or sell puts and calls on ETFs to protect against possible losses and thereby increase my possible upside. |
| Barry: | That certainly seems better, to have both a professional doing the stock picking and you just accentuating or lessening the impact of market change by using options. Also, it will take less of your time. |
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Larry: |
Ok, you win, I will go back to what I do best. Thanks. |
Arthur Lipper, chairman arthurlipper@gmail.com
British Far East Holdings Ltd.