Americans generally not prepared for retirement

The latest Employee Benefit Research Institute survey is out, and it’s not pretty (and hasn’t been since I started following it).

Only 14% of Americans are very confident they will have enough money to live comfortably in retirement.

Employment insecurity is the most pressing financial issue facing most Americans.

60% of workers have less than $25,000 in savings and investments (!) outside their home and defined-benefit plans (pensions).

Half of retirees said they left the workforce unexpectedly (due to health problems, disability, layoffs, or their employer closing)–meaning that most of those expecting to work longer won’t really have that option.

I don’t know if retirement just seems too far in the future, or if the virtue of thrift has gone by the wayside, but most Americans aren’t doing what it takes to prepare for their future.  

They may heartily blame someone else, but “truth be told, if you are looking for the guilty, you need only look into a mirror.” 

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Americans generally not prepared for retirement

Picking natural resource investments

It’s hard to avoid headlines about the price of natural resources.

Oil has been hitting new highs almost every day this week. Iron ore and coking coal have become hot investments because they’re major inputs for steel production. Even stodgy agriculture is seizing the headlines.

So, how should one go about picking a natural resource investment to benefit from the boom?

First, it’s probably too late to join the party because prices reflect a lot of the boom already. There may be some bargains to be had, though, if the global economy continues to slow down.

What should one look for in a natural resource investment?

The first thing I like to find is low costs. Low cost producers, especially in commodity products, have a huge competitive advantage. The companies with the lowest costs to extract oil, gold and iron ore, or produce wheat, soybeans and corn will exhibit higher profit margins and returns on capital.

Scale may be one reason for such an advantage. Another may be a proprietary production process or unique access to geologic locations. Yet another may be a management team that can motivate and hire more productive employees. One of the most important advantages is a management team that knows how to allocate capital to the best returning projects.

The second thing to consider is the sustainability of such costs. Some advantages are easily competed away as soon as others recognize them. To benefit from a specific cost structure, it must be sustainable over time.

One example is oil sands. Oil sands have much higher costs of production than other oil extraction projects. But, they have reserve lives of 50 years versus reserve lives of 10 to 15 for most large, integrated oil companies. (full disclosure: my clients and I own a position in an oil sands company)

Low costs and the sustainability of a cost structure are very important in looking for natural resource investments. Does that mean you should find the company with the lowest, most sustainable cost structure and purchase it? Emphatically: NO!

It depends on the price you pay for that company. The math behind investing is simple, but not easy to implement. To find the best investment, you have to compare the economics of a business to the price you pay for it. Frequently, this means buying a second tier company whose price doesn’t currently reflect its cost structure and sustainability. The best company in an industry rarely goes on sale for a rock bottom price.

Picking a natural resource investment requires a focus on the economics of a business and its sustainability, its management, and its price relative to economics and management. If that sounds like a generalization for picking any investment, that’s because it is.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.