The Key to Your Investment Survival Next Year

Back in 2001, I took care of trillions of dollars in government bonds for Citigroup. At the time, "Citi" was the world's largest bank.

We were financing Citigroup's balance sheet. We took trillions of dollars of bonds and lent them to other banks in return for interest. I was the accountant on the team. My job was to figure out how much interest my traders were bringing in... versus how much interest Citigroup was charging them to use its capital. 

Our trades were much bigger than any other bond-trading desk anywhere at Citigroup. I once handled a $4 billion trade, for example.

Now... when most people in the financial world think of bond traders, they imagine guys buying and selling bonds all day. This is the glamorous side of the business. These are the guys who drive around in Maseratis. No one ever thinks about the traders who do the borrowing and lending. It's not as glamorous.

Even though my team moved trillions of dollars every day... and were one of the most profitable trading desks in the building... the rest of the firm treated us like a backwater.

I see the same attitude every day in the real world. We watch CNBC for the stock market prices... we're all experts on house prices... and flat screen TVs... and new cars. These are the things we buy and sell. These decisions have much less impact on our daily economic welfare than our income and expenses... but we all pay much more attention to them.

Here's the thing: I haven't spoken to my old colleagues in a while, but I'm willing to bet, after the pummeling we've just seen in the credit markets, Citigroup is giving this "unglamorous" function more respect right now. We'll see more respect for the basics in the real world, too. Let me explain...

The market is a giant prediction machine. By falling 35% in the last year, it's saying America is going into a recession. That means higher taxes, more inflation, and fewer jobs: 2009 is going to be a tough year for most Americans.

I think this will make people turn their focus back to the basics again... back to our jobs, our mortgages, our car payments. The economics of these cash flows are not glamorous... but they're fundamental to our quality of life. In tough times, controlling these cash flows is the key to people's survival.

What am I doing in my personal life? I'm not thinking about new houses and cars right now. I'm figuring out how to make sure my income exceeds my expenditures. I'm paying attention to my job security, my mortgage costs, and my utility bills. I'm trying to reduce my tax liabilities.

And in the stock market, investments that pay solid income streams are going to be the hot item for 2009. Investors are going to dump stocks that don't pay dividends. They're unnecessary luxuries. They'll buy stocks that help them meet their monthly expenses instead.

I'm looking at blue-chip stocks with long track records of paying bigger dividends every year. Wal-Mart and McDonald's are good examples. Their products help people save money. Cheap shopping and cheap food are going to get more popular.

On the other hand, I'm avoiding companies like Tiffany's and Whole Foods. And I'm not interested in money shufflers like banks and brokers or property companies. They all rely on people making large investments.

I'm looking at the master limited partnership (MLP) sector. Natural gas is a critical commodity we all use, even in a recession. I'm picking out closed-end funds that trade at big discounts to asset value and pay large dividends. I like covered call strategies. And I like companies with large cash balances, low debt burdens, and the power to generate strong cash flows.

Good investing,

Tom