Woodcreek's annual update...

After a year of investing, I've learned a lot. I've made some good trades, some bad trades, but most importantly I've made some money!

I finished the year up 55% after fees! I was able to turn roughly $2,350 into nearly $4,100! If fees weren't included, that gain would have been over 83%. Lesson learned there, trade larger dollar amounts rather than making a number of smaller trades.

I've made the shift from trading good stocks and balance sheets like Buffet, to trading on hunches, to trading on indicators like MACD. I've had success with each of these styles, as will as some misses with each. I've also found a couple stocks that I've had success trading and plan to keep doing so. So far, I'm liking trading Dow and Skyworks, but I keep an eye on lots of other stocks like Kroger, GE, Citigroup, MGM, Ford and Manitowoc to name a few.

Here's to many more years of successful trading to come!

The auto bailout

ESPN's Tuesday Morning Quarterback Gregg Easterbrook has some great discussions on the economy and bailouts spliced into his football column. My favorite part is at the end of the column regarding the government's negotiations with the auto companies.

Based on how poorly Washington has negotiated with General Motors and Chrysler, here's what it might sound like if Nancy Pelosi was buying a car:

DEALER: Yes sirree, I can let you have this cherry-red baby for $19,999.99! Plus undercoating and dealer prep.

PELOSI: I'll pay $50,000.

DEALER: For a limited time only, I can throw in remote-controlled eight-way power cupholders, for another $999.99.

PELOSI: I'll buy them at $75,000.

DEALER: Do you want the extended warranty?

PELOSI: No. But I'll pay another $25,000 for it.

DEALER: Aren't you worried something will go wrong?

PELOSI: If it does, I'll just send the bill to the taxpayer.

DEALER: So you are willing to pay $150,000 for a $20,000 car? I'll have to go ask my manager! (Disappears into back, pretends to talk to manager, returns.) Lady, you drive a hard bargain. He says that for $31 billion, we will give you absolutely nothing at all.

PELOSI: Sold.

Its funny and cynical and probably close to the truth. Earlier in his column, Gregg mentions it would have been better for the government to buy cars from GM and Chrysler, rather than just give them the money outright. Besides helping Detroit immensely, this is the kind of out of the box thinking that we desperately need.

How does this relate to investing? Well, over the past month, we've been looking at auto companies and their suppliers as potential short term investments; buy them low, hope for good news to drive stock up temporarily, and then sell. Obviously risky, but potentially very profitable. However I can't really see any of these stocks rising in a manner worth the risk, unless the bailout (or any major event) truly does something to improve the long-term fundamentals of the company. I could be wrong, but right now I will be looking elsewhere for short-term profits.

More shenanigans from credit card companies

I mentioned back in February that Experian was dropping access to your true FICO score. Liz Pulliam Weston has a great article on some of the deceptive practices of credit card issuers and why we should demand to have free access to our FICO credit scores, the scores used by most lenders and the ones that have the greatest affect on a person's ability to get a loan. I highly urge you to visit the links on the second page and send a message to your congressperson.

Why is fair credit practices vital for an end to this recession? We all know by now that the lack of credit flowing through the country is a huge problem. However these deceptive practices by credit card companies are hampering people from spending when the country needs it most. For example, a small business owner might not have needed to use credit a few years ago, but does during this recession to purchase new inventory. He has keep his balance low, paid on time, and used his credit responsibly. However, the credit card company sees him as an infrequent user of credit, reduces his credit limits (or closes the account altogether), and now the business owner can't make the purchases he desperately needs to get him through the recession. This is happening all over the country, and until we put a stop to this, the recovery will take longer than it needs to.

Don't try to figure this market out...

Watching and participating in the market over the last few weeks, one thing has become exceptionally clear; there is no clarity.

I've pulled three straight great trades (Lear +52.3%, Citigroup +57.25% and Bank of America +15.83%), I'm up roughly 13.5% on all buy & sell trades since I started trading in December, and my holdings of GE and Manitowoc Co. have been moving around their break even points, yet I still don't feel too confident in the market, nor do I have any real gameplan moving forward.

The best thing I've found to do so far is to follow the old adage "buy on the rumor, sell on the news". This has worked especially well on companies the government is subsidizing through loans and bailout, but you need to be careful because things can turn on a dime. A perfect example of this just happened with Bank of America. As I outlined in posts to the topic "Paul Woodcreek's Personal Portfolio" (http://11bagger.blogspot.com/2009/01/paul-woodcreeks-personal-portfolio.html), I chose to buy BAC because the government wasn't going to let it fail, the CEO hinted at big profits, and the price was low. I bought at $7.6482/share on 4/3 and rode it up to $11.58/share on 4/14. This is where things stood six days before they were to announce earnings. If nothing else, I figured it would slowly climb upwards until earnings were released... I was wrong. As of Friday (the last trading day before earnings were released), the stock saw a high of $11.23/share. I decided to hold through the weekend in hopes BAC would beat the estimates of $0.04/share. When I saw the earnings come in at $0.44/share, roughly 9x expectations, I figured this stock would skyrocket. Looking at pre-market numbers today, the stock was down about 8% and was at a point that my $1 trailing stop would have sold me out of the stock on open had I not changed it. So, I figured I'd widen my margin to $1.50 and see what the day held for me. BAC dropped like a rock... my trailing stop sold me out before 10:30AM!

When the dust settled, I still netted 15.83%, but I also left about $2.50/share of profits uncollected (DOH!). BAC ended up closing the day at $8.02/share, down 24.34%. This on a day where they blew away earnings estimates. I don't understand it, but I'm happy to take my profits and move on. I'd urge all of you to do the same... when profits are there to be taken, don't get greedy, just take them. This market is irrational and dangerous, even if you're right on top of things and try to use common sense.

Mark-to-Market accounting, bank stocks and you...

Here are a few links that explain mark-to-market accounting and what it could mean for investors...

http://www.newsweek.com/id/192562

http://www.bloomberg.com/apps/news?pid=20601039&sid=ajc25z7IOrTk&refer=home

http://online.wsj.com/article/SB123880085634588515.html

http://uk.reuters.com/article/bankingfinancial-SP/idUKBNG40992520090403


So, what does all this mean? Well, to most people, not much. However, if you're savvy and can keep a portion of your portfolio liquid and an eye on these stocks, you could potentially make some money with these changes. Most traders probably aren't that plugged in, so my plan is to continue to trade bank stocks under the assumptions that they are so beaten down there's a ton of upside potential, there's very little downside since the government has shown they aren't going to let the big banks fail, and since the banks hold all the money that drives our economy, they have to improve before the rest of the market does.

So when is the time to get in, and where do you place your bet? My plan is to play a mix of banks I'm expecting to turn a profit and those who may be returning TARP funds to the government. As you may have seen in the blog post on my personal portfolio, I've already been in and out of Citigroup (NYSE: C) in a small, but highly profitable trade, and now I'm into Bank of America (NYSE: BAC). If BAC can show a profit when they announce their Q1 results on April 2oth look for this one to skyrocket. Their CEO, Ken Lewis, said a month or more ago he was expecting a profit and the stock promptly took off.

http://www.usatoday.com/money/industries/banking/2009-03-12-bank-of-america_N.htm

What I'm looking for from BAC is a quick jump in price, then I'll set my following stop and see what happens. If it quickly spikes, then retreats a bit and the stock sells, I'm happy with the profit and will move on. If it goes on a long term climb, all the better. Either way, I'm looking to turn a profit then move on to something else. The nice thing about BAC is they'll be announcing their earnings a couple days later than JP Morgan (4/16) and Citigroup (4/17), so if things turn south in those announcements, there's still time to bail. Wells Fargo announces earnings on 4/22, so if you wanted to trade without any insulation, you may want to play Citigroup then Wells Fargo due to the spread between announcements being greater than three trading days.

Japanese companies with a durable competitive advantage

Warren Buffett emphasizes buying companies with a durable competitive advantage, while Peter Lynch talks about finding companies that aren't well known but are run well, and poised for growth. I am currently in Japan visiting my brother and I wanted to mention a few companies that I see fit those molds. I haven't had time to look up stock information, or see if they are publicly traded companies, but maybe there are a few gems in here.

First up are beverage companies in the Coca-Cola realm. In Japan, there are two main beverage companies, Asahi and Suntory, that have a monopoly on the beverage industry, be it soft drinks, beer, or fruit juice. Japan is litered with vending machines, and you are guaranteed to see a Suntory or Asahi product on every street, usually for 20-30 yen ($.20-$.30) more than you can buy them in a regular store.

Second are the convenience stores, in the vain of 7/11, which they actually have in Japan. The two other main stores are FamilyMart and AmPm. Most of these stores are open 24 hours and you can't go a few blocks without seeing one. There have always been people in these stores, regardless of the time I have entered one.

Finally, there is the grocery chain Daiei, similar to a Meijer or Kroger (for you Michiganders) or a smaller Wal-Mart that has a full grocery section. This seems to be the best place to do all in one shopping, although I have heard there are a few Costco stores in Japan, for those bulk shopping trips.

I don't know if anyone of these companies have stock that can be purchased, but for those looking at companies within Asia, those are a good place to start.

Japan to lead at G20?

Here's one for all you readers kicking it in Japan:

Prime Minister Taro Aso of Japan contends that Japan is ready to take the lead at the G20 summit.

"industrial output was down 9.4 per cent month-on-month and data on Tuesday showed the most rapid worsening of job availability since 1974 – Mr Aso’s message is clear: Japan remains a force in the world"

In my opinion, Mr. Aso has no choice but to take this tactic to G20. Due to Japan's size and technology heavy economy, they rely very heavily on exports. Japan's economic problems will likely be among the last of the economic superpower's to clear up due to this reliance on other economies improving first. As other countries race their currency to the bottom, Japan's exports get even less attractive.

Whether or not Mr. Aso really believes that his country is in a position to lead the world's economic policy doesn't matter--for Japan's sake he hopes they listen because Japan needs the rest of the world's co-operation.

Oh, and he has an election coming up in November.

Personal Finance: More on Life Insurance

There are a few remaining questions I wanted to answer with regards to life insurance. I don't want to get into the whole term versus cash value life insurance debate at this time (I'll save that for next week). There are situations where cash value insurance can be useful, but typically you are better off with term insurance.

How do I purchase life insurance?
You can purchase coverage over the internet or through a life insurance agent. Insweb is one site that I have heard of, but there are many different providers out there. It is extremely important to select a company that will pay your claims. I would go with a company that has been around for some time (20 years or more) and is rated A (preferably better) by the rating agencies. Unlike much of the debt that was rated shadily by the agencies that has caused our current fiscal crisis, the ratings agencies actually do a pretty good job with life insurance companies because these type of companies have been around forever and are easy to understand.

How do life insurance agents get paid?
Agents work on a commission that is dependent upon the annual premium you pay for the policy. Most of your first year premium is actually going directly as compensation. For instance, if you buy a 20 year term policy for $1000 annually, the agent will get somewhere between 50%-90% of that premium as a first year commission. If you keep the policy in force for more than 1 year, the agent will usually get trailing commission of around 5%-20%. The actual percentage is going to depend upon the pay structure of the company the agent is working for.

Additionally, compensation for cash value life insurance is typically higher than term insurance. For example, for a $1000 annual premium policy, an agent may be paid $700 for a term policy and $800 for a cash value policy. This is not always the case, but it is typically what I have seen.

I will get more into the differences between cash value and term insurance in my next personal finance post. If you would like any particular questions answered as well, I will try to cover them in that post.

Personal Finance: How much life insurance do you need?

I hope to use Thursday's posts to talk about personal finance issues. Up first is the misunderstood world of life insurance. I'm assuming you already know that most people need it. I can attest personally to its importance as my dad died when I was in college, and if not for life insurance, I never would have finished college, and my mom, brother and myself would have struggled financially for sometime afterward.

Who needs life insurance?
Anyone who would inconvenience a loved one financially if they die. If you own a home, have kids, are married, or have a lot of non-student load debt, you probably need life insurance. Students and other young people don't necessarily need it, but if they can afford it, it is a good way to guarentee coverage against some future uninsurability.

How much coverage should you have?
A good rule of thumb is 7-10 your annual income, but much there are several calulators that will better estimate what you need (here and here). At a minimum, I would recommend enough to cover burial expenses, and 2-3 years of income replacement for your family. Ideally though, you want to pay all debts and provide several years of income replacement, possibly even funding retirement for your spouse, or paying for college for your kids. I am single without kids and I have enough coverage to pay off my house, pay off my debt, and give both my mom and my brother a nice inheritance should I die. Of course, how much coverage you get will be based upon how much you can afford to spend and your ability to qualify for coverage.

What type of coverage should I get?
In general, term insurance will be the most affordable for the majority of people, but there are some instances where permanent insurance is useful.

I will explain more about the types of coverage and how you go about purchasing it, in the next post on the subject.

What are your thoughts on life insurance? Post your comments below.

Club Update 3/10

Since the last club update, most of us have experienced some significant financial changes. In light of this we have decided to suspend contributions to the club for the next four months while things sort themselves out.

This doesn't mean we'll be abandoning the blog--to the contrary we'll be trying to keep up daily posting and making it as worthwhile and interesting as ever. We'd really appreciate any comment you guys could leave, telling us what you like or don't like about the posts so we can tailor some of the content to what you're interested in!

Choosing to invoke hardship was something the club didn't take lightly, but thankfully the entire club agreed on the procedure. Also helping out was the fact that we spelled out hardship conditions and voting procedures in the General Partnership--just another example of how a well written GP can cover your club in a sticky situation.

Right now we're taking away the possibility of further capital investment, but we hope to use it as an opportunity to continue to work on bylaws, the blog, and further educate ourselves so that when we are ready, we can pull the trigger on the next big purchase.

Add to that a bit of good news, as GE went up 1.46 today, and we're feeling that we're on solid ground.

Link'O'Rama: Tuesday Edition

• Is the shorting of stocks keeping our market down? I first got wind of this theory in a recent article in the Financial Times, and this column suggests it as well.
• The newest Jim Jubak column
• This article details what to do in anticipation of a layoff
• There is a hidden war on the rich by the rich
• Is the housing bust over?
  

Dried Supply

In an excellent article, Forbes.com probes the financial woes of the other half of the Detroit auto disaster--the suppliers.

To engineers living in Metro Detroit, names like TRW, Lear, Federal-Mogul are common. We all know people who work at these places and in some cases have worked or interned for them ourselves. These automotive parts suppliers are huge employers and even bigger supporters of local engineering colleges within universities such as Lawrence Tech, University of Michigan Dearborn, and Kettering.

It's good to see that the Obama administration understands the importance of keeping an eye on these suppliers--so that all of the efforts going towards keeping GM and Chrysler afloat don't have the rug pulled out from under them.

All local Detroit pride and empathy aside, Forbes illuminates an ugly group of shares that have been de-listed (Visteon), may be de-listed (American Axle), and have lost more than 98% of their stock price from their 52 week high (Arvin Meritor, Dana Holding, Hayes Lemmerz).

Johnson Controls piqued my interest with its 27% long term debt/total capital ratio (low for this group). A further look at their financials show that they actually posted a $1.63 earning per share in 2008--another rarity for this group--and they are a company with a long history of posting profits.

Can anyone see a diamond in the rough here that will survive all of the turmoil and emerge on the other side? If you can you might have a winner.

Link'O'Rama: The Singleling

Only one Link'O'Rama link today, but it's a good one. Jim Jubak's new column asks investors to use this time to determine which stocks are truly great, and which one's were full of smoke and mirrors. Some key points:

• We are due for a short rally in the near future due to stocks being massively undersold.
• Look at the fundamentals of the stock, and not just the price.
  
• We can't look at the 52 week high as an indicator of where the stock should go back to in the near future. That price was probably highly inflated.
• Former CEO golden boy Jack Welch is highly responsible for GE's current woes, since he restructured the company from an industrial one into a financial one.

I hope to get Link'O'Rama back up and running, with a roundup of the best links two or three times a week.

Rethinking health care

With costs of health care skyrocketing nationwide, Schlitz suggested I talk about health savings accounts, also known as HSAs. This post assumes you have a minimal knowledge of health insurance. An HSA is similar to a Flexible Spending Account (FSA) offered by most employers, where pre-tax dollars go into an account to spend tax-free on medical services and items. The difference is all FSA dollars must be spent in a year, whereas HSA dollars rollover from year to year, meaning over time, quite a bit of money can accumulate in the account to be spent on health care later on in life. Additionally, the HSA can earn interest each year, and can possibly be invested in the stock market (I know, risk right now). To get this tax benefit, an HSA must be coupled with a high deductible health plan (typically a PPO or HMO).

While all that mumbo-jumbo sounds nice, how does an HSA benefit you the consumer? First off, HSAs give the biggest benefit to healthy people who rarely use health care, but the principles can apply to anyone. Say you have a traditional PPO at work, where the premium is $300 a month and you pay $100 out of pocket, meaning your company pays $200 a month. A high deductible (say $5000) PPO might cost $100 a month, leaving $200 to go into the HSA. After 1 year, you have $2400 in the HSA. If you go to the doctor once per year, you will use a minimal amount from the HSA, allowing the HSA to accumulate year after year, possibly letting you acquire a large amount of money in your older years, when health expenses are higher. If you do get very sick and need expensive procedures, you have coverage once the deductible is met.

Of course, there are downsides to HSAs. The first being that you take upon more risk in the beginning as there is no money in your HSA and the the initial deductible must be met out of pocket. HSAs are difficult to explain to people used to a traditional health plan. And it assumes that people will act rationally with funding their HSA and choose conservative investment options, which if recent history is any indictation, cannot make responsible decisions for themselves. However, once you get past those issues, the upsides are enormous.

What did you think? Do you wish your work offered an HSA? Are you against the idea? Share your thoughts below.

Recession, depression or correction?

With all the talk of the current economic situation now being officially classified as a recession and quickly heading toward the official classification of a depression, I got to thinking that maybe it isn't a recession or a depression, rather a correction. When I explained this theory to Schlitz over lunch last week, he raised an eyebrow, but heard me out on my reasons for making that assertion.

If you've made it this far into this post, hang in there, I'll explain my line of thinking on this to you too.

First, I became a bit skeptical of calling this a recession when I noticed that the dollar has actually increased in value against competing currencies over the past few months. The 'experts' say, "well, this is a global recession and the U.S. is still an economic powerhouse." Okay, so if we're all in a global race to the bottom and the U.S. economy is actually falling slower than most of the rest of the world, wouldn't that support my idea that this is simply a correction?

Second, I started looking at the DJIA's historical graph from '70-present and noticed that the period from 1995-2007 just didn't fit with the rest of the graph. That period was a giant bubble in comparison. To put it simply, the DJIA was about 750 in 1970 and only climbed to 3,750 at the end of 1994. That's a change of 3,000 points in the span of 25yrs. Now, looking at the span of time from 1995-2007, the DJIA went from 3,750 to about 14,100 at its peak in October 2007. That's a change of over 10,000 points in 13yrs. What's that all mean? Well, from 1995-2007, the DJIA climbed at a rate that was over 6.4x as drastic as the preceding 25yrs!

So what happened from 1995-2007? The short answer is the dot com boom from '95-'01, followed by a housing boom that started with sub-prime mortgages in the early 2000s and finally spiked in 2005 and began to burst in 2006. Basically, it was a bubble that formed on top of another bubble, and when it finally burst, the market went down like few imagined was possible.

Getting back to my assertion that this is a correction rather than a recession or depression, I looked at history again and used it as the basis to form projections about where the market should really have been if the dot com boom and sub-prime mortgage that spanned from '95-'07. I chose the span of time from '86-'94 as my data group from which to project forward. Why '86-'94? Well, in 1986, the Tax Reform Act of 1986 was passed and it removed many tax shelters, especially in real estate, and put an end to the real estate boom that occurred in the early '80s. Basically, the span of time from '86-'94 fell between the early '80s real estate boom and the dot com boom of '95-'01.

Using a single arbitrary data point from each year (I chose a date in mid-January for each year), I formed a pool of data representative of the span of time from '86-'94 and projected it forward to eliminate the double bubble of '95-'01. What did I find? Well, using those projections, I found that the DJIA should probably be at 7,687 for January 2009. That's a pretty accurate projection considering the DJIA actually fell to 7,949 in January 2009. Since that point, the DJIA has found a new low of 6,594 last week. Well, doesn't that mean that my projections are off then? No, it doesn't... I'm not projecting the bottom, I'm projecting the normal level. Negative market sentiment could easily drive the DJIA even lower than 6,500. Until consumer confidence returns to normal, the market will continue to be a bear market and will be driven to levels below its norm.

While I won't get into it in this post, I've also created a theory on individual stock price projections using the same data points that also appears to be pretty accurate so far. Stay tuned for that as it may change your thinking on perceived values.

Times are tough....We want to help

Times are pretty terrible right now. The market is down to unimaginable lows, unemployment is high, and household incomes are shrinking. Here in Detroit, we see it more than anywhere, with a 'for sale' signs in so many yards to go along one of the worst housing markets in the country. I could go on and on, but you get the idea.

As a new investment club, we have and are going to continue to make tough decisions regarding the direction of the club. We plan to put more energy into this blog, to fill it with timely and useful information. We plan on focusing on areas outside of investing, such as personal finance, finding employment and so forth. We think this is important because only after one's financial house is in order, can one truly devote time to learning about investing. Please feel free to provide us with any comments you might have, or any areas you wish to learn more about.

Club Update

We haven't been posting too much about the club lately so here's a quick update:

-We bought GE a few weeks ago when it was at $12.50 (little did we know it would lose 44% of its value in such record times). The club is still confident that this will rebound and make a profit in the long term, but the recent plunge may have delayed that time frame from being a 1 year turnaround to a 2 year turnaround. The financial track record with GE is too long and too strong to get weak in the knees now and give up, the club feels.

-We've been working slowly on bylaws regarding club accounting practices, and look to start writing bylaws on voting and stock evaluation in the next month. After that we need to write additional bylaws about meetings, attendance, adding new members, and more. After all the bylaws are written, we will consider opening the club up to new members.

-We have another salvo of investing cash and are considering where to invest next. Several options are out there, but we're still researching new stocks and opportunities as well. MTW is the leader in the clubhouse, but we're not in a rush to put money into the market right now. This isn't to say that we're afraid or are trying to time the bottom, we just don't feel urgently.

I'll try and make these posts a weekly edition on Tuesdays to give you readers an insight into the car-azy world of our investment club.


Are there any interesting stocks out there that you would like to recommend? Any interesting stories about developing your own club's bylaws?

Dow Below 7000, head to the bomb shelter

Today the Dow closed below 7000 for the first time since 1997, less than half its peak in 2007.

The Street is wary, says Forbes.

MSN Money asks its users if they will ever invest in stocks again. Many say no.

Look up, the sky is falling.

Is it hard to have faith in the market right now? It sure is. There are fear mongers and Chicken Littles everywhere out there. In the media. On the message boards. Through the blogs.

This is the downside to risk, the downside to getting fat off of greedy capitalist schemes. This is the downside to too little regulation, to not enough regulation. We knew it could all go wrong and now it has.

Or has it?

If you're not a little afraid right now, you're not human. If you're not strong enough to have faith right now, you won't see the promise land.

Get together with your fellow investors, be you in an investment club or not. Assure each other. We'll make it through, come sub-7000, 6000, or 5000.


Turn off your TV.

Credit bureau drops access to credit score

One of the three credit bureaus, Experian, is dropping access to their FICO score. This means only 2 of the 3 scores used to judge consumers on their loan-worthiness will be available to the public. MSN's Liz Pulliam Weston describes what this means in this article.

I personally am going to be contacting my congressmen about this. Congress finally got its act together in the past few years and gave everyone access to their credit report via annualcreditreport.com (no, freecreditreport.com is not the correct site, and is somewhat of a scam, regardless of what the catchy jingle says). However they need to go further and give everyone access to their FICO score for free. I recently noticed a mistake on my credit report, and got it fixed, but only after I payed $13 just to see my score. In this economy, I have a hard time believing people will be able to fork over almost $40 just to see their most recent credit score.

The link to your House Representatives and Senators can be found here and here.

You can copy and paste this text into the box:

Dear Congressperson or Senator, please lobby for reform in regards to FICO scoring. Consumers
should have access to BOTH their credit reports AND credit scores, from all
three credit bureaus (Experian, TransUnion, and Equifax) for FREE. Consumers
should also have access to the secret scores keep by insurance and other
financial service companies. This article details why this is best for
consumers, i.e. your constituents.
http://articles.moneycentral.msn.com/SavingandDebt/ConsumerActionGuide/tell-congress-no-more-secret-scores.aspx?page=1

UPDATE: Some of you may be wondering how this affects your investing? Well, higher credit scores translates to lower interest rates on debt, meaning more money left over to invest. As Martha Stewart would say (in the ultimate sense of irony), "It's a good thing!"

Outraged? Disagree or don't care? Share your thoughts in the Comments section.

Bylaws-Setting the Table

Our club has recently begun drafting bylaws to go along with the general partnership that we drafted, ratified, signed, and got notarized earlier this month.

The process of drafting bylaws will be long and nuanced, but we really want to make sure that we have our bases covered. As we grow beyond our current four members we want to assure the ideals and goals that we formed the club upon will be passed on to new members--as well as making sure all the legal loose ends are tied up in case of any uncomfortable situations.

No one wants to have to kick a club member out or have someone quit over a disagreement, but if our club stays around as long as we hope, these things might come to pass. It is better to put in the hard work up front in drafting the partnership and bylaws than to rush to expand and then find out we have no adequate recourse to police the club.

Sly has been invaluable in writing the first draft of the partnership and the bylaws thus far, but the rest of the club members will also be writing sections of the bylaws--to make sure that we are all accountable in the legal and logistical foundation of our club.

UBS, or how I learned to love the offshore bank account

Recently, UBS has been back in the news as the United States government is trying to pry loose the names of 52,000 account holders that are ostensibly using the Swiss bank as a tax haven.

This comes a year after UBS officials admitting wrongdoing (including criminal cases) for aiding in tax avoidance cases.

So why's this news to you or I who don't have Swiss bank accounts? The percentage of people who misreport their income in the US is between 7 and 15%. In this economic climate, when the government needs every penny they can get to finance the $787 billion economic stimulus, you can bet they're going to tighten up on tax enforcement to get some of what's coming to them.

Bush was lax for years on tax enforcement, but this UBS action may be a signal to tax cheats: if we can take down UBS, we can take you down too.

Divi-doo and Scrappy too!!!

Recently, I posted on the reasons why you might not want to own dividend paying stocks. Now I want to look at some reasons why dividends might just be a good idea right now.

• If you are in need of income from your stocks (for example, a retiree), the dividend yield on stocks right now is much higher than that on bonds. GE was at over 11% about a week ago, and with the recent drop in the stock, is now at over 13%. US Treasuries are below 3%, and other corporate bonds are around 4%.

• Assuming the stock is at or near the bottom, the high yields make for a great return even if the share price stays flat for the next few years, and help support the value of your portfolio. Now this assumes that the company won't cut their dividend, a possibility due to this economy, but in general, there is too much shareholder pressure to keep the dividend, if the company has any sort of strength to it.

• In value investing, the dual taxation of reinvesting dividends hurt your long term return, but if your goal is income, dividends are taxed at a much lower rate, currently 10% or 15%, usually lower than a person's ordinary tax rate.

Agree/disagree? What other reasons do you see for dividend paying stocks? Share your comments below.

Quote of the Day - 2/21/09

"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."

-The late Dr. Adrian Rogers, 1931 to 2005, Former Pastor of Bellevue Baptist Church

And so it begins...

Several states have begun measures to declare their sovereignty from the United States under the Tenth Amendment.

This could get interesting... http://www.campaignforliberty.com/blog.php?view=10775

Not sure if this is just a tie to the need for bailout funds or what's really going on, but this is a list I saw somewhere. Unsurprisingly, I haven't heard a peep about this on TV.

DECLARING SOVEREIGNTY
01. Washington
02. New Hampshire
03. Arizona
04. Montana
05. Michigan
06. Missouri
07. Oklahoma
08. Hawaii
09. California
10. Georgia

WORKING ON DECLARING SOVEREIGNTY
11. Colorado
12. Pennsylvania
13. Arkansas
14. Idaho
15. Indiana
16. Alaska
17. Alabama
18. Nevada
19. Maine
20. Illinois

Here's a link to the Wikipedia article on the Tenth Amendment... http://en.wikipedia.org/wiki/Tenth_Amendment_to_the_United_States_Constitution

These are the two areas that I keyed in on in that article...

1. Interpretations of the amendment can be divided into two camps. The first interpretation, as held by the Tenth Amendment Center, most of the Founding Fathers, the Libertarian and Constitution Parties, and a few Republicans including Ron Paul and Jeff Flake, is that the Constitution does not grant the United States any power that it does not expressly mention. This has been used as the basis for such court cases as Gonzales v. Raich, and for arguments in favor of repealing a large number of Federal laws, abolishing the Federal Reserve, and drastically slashing the Federal budget by 50% or more. It is also why amendments were necessary for the abolition of slavery and the prohibition of alcohol - without said amendments, Congress did not have the authority to do those things. The contrary opinion, as held by most of the current U.S. Government, is that the Constitution grants Congress the authority to do more or less anything that is not explicitly prohibited by the first eight amendments.

2. For this reason, Congress often seeks to exercise its powers by offering or encouraging the States to implement national programs consistent with national minimum standards. The mechanisms are discussed in the article on cooperative federalism. One example of the exercise of this device was to condition allocation of federal funding where certain state laws do not conform to federal guidelines. For example, federal educational funds may not be accepted without implementation of special education programs in compliance with IDEA.

So, this could be the start of the break-up of the U.S. (see Paul's stance in area #1 above) and possible formation of a North American Union of sorts, this could be a push towards socialism (see the contrarian stance presented in area #1 above), or this could have nothing to do with any of that and everything to do with the allocation of federal bailout funds (see area #2). Being that Ron Paul supporters started the push in Oklahoma, area #1 above becomes a very important debate. This could be a means for getting a ruling that the Federal Reserve, federal bailouts, etc. are unconstitutional and forcing the federal government to butt out of the current economic shit storm in order to allow the free market to try to restore order on its own. If that happens, look for a large number of job losses due to the collapses of the poorly run corporations, and as a result more people losing their homes. As an investment club, may want to buy some shotguns, ammo, bottled water, generators and learn how to short stocks.

Divi-don't????

With GE's dividend yield sitting above 11% right now, there was talk of GE cutting the dividend this week. Even in the midst of bankruptcy, a few months ago GM was looking to keep its dividend at $.01 so that its stock would show up on the radar of mutual fund managers that screen for dividend paying stocks. Retirees whose portfolios have been devastated by the market crash are hoping their quarterly dividend check will still be there to pay the bills. Dividends are on the mind of everyone right now as a means to get some sort of return in a time of uncertain and stagnant returns.

What are some reasons for a company to pay dividends? In my mind, the first is a purely aesthetic marketing ploy. Paying a dividend appeases shareholders who are used to it or who will only buy shares in dividend paying companies. Further dividend paying companies appear more stable.

The second is that the company does not have a good way to spend some of its profits to produce a return and rather than sit on the cash, decides to return it to the shareholder. Buffett does not pay a dividend on Berkshire Hathaway because he believes he can produce a greater return for his shareholders with that cash. Further releasing a dividend is not tax-efficient as it subjects the shareholder to a double tax, first on the corporate level via a tax on profits and second on the actual dividend being paid out. If the company is truly run well, the most efficient way to a return is by the company not paying out dividends.

This is not to say dividends don't have a place, depending upon the situation. Stay tuned for more discussion and analysis in this arena.

Agree/disagree/ferociously disagree...share your thoughts below.

Starting Your Investment Club.

We started our club with a Bogle-like mindset of minimizing operating expenditures. This mindset unintentionally led to a tiny profit in start-up costs. Here’s what we did.

(1) A How-To Book. Invest in a good book to guide you. We purchased the “Investment Club Operations Handbook” from the Better Investment Community. Cost: $26.95.

(2) Club Address. A nearby P.O. Box. Annual cost: $56.00.

(3) EIN’s/Banking Part I. We arrived at Chase bank to open a business account and were told we needed an EIN. What’s an EIN? It’s an Employee Identification Number issued by the IRS associated with your club. Every investment club is responsible for annual taxes and needs an EIN like individuals need an SSN. EIN’s are obtained free of charge through the IRS at irs.gov. Cost: Free. I called the IRS and their customer service agent was very helpful unlike those at Chase Bank...

(4) Banking Part II. We return to Chase with the EIN and were told we also needed a recognition of Partnership from the county. The Chase agent then handed us a self-contradictory page stating we only needed the EIN. I found myself irritated while Cadillac and crew more calmly found a temporary checking account giving us a $125 opening bonus. Awesome, beating the S&P already. Gain: $125.00.

(5) Partnership. The County Clerk helped us get through the correct forms properly. Cost: $10.00.

(6) Banking Part III. We used the personal account of the last visit to receive an additional referral bonus in setting up the Chase business banking account. Gain: $50.00.

(7). Business Checks. One box of duplicate business checks ordered online. Cost: $15.94.

(8) Trading Account. Scottrade seemed convenient, good for customer service, inexpensive ($7/trade), and included a referral bonus for 3 free trades. Woodcreek has an earlier post describing the various online brokers. Gain: $21.00.

In the end, the net cost of establishing the club was a gain of $87.11. --Schlitz

More Link'O'Rama

Link'O'Rama is back and ready to melt your face!!!!! Buy, buy, buy! Sell, sell, sell! Any more obnoxious and we'll head to h#@l! (Hey it works for Cramer)

Six stocks to watch and buy later - Jim Jubak
Economy needs a bold massive jolt - Fareed Zakaria
McDonald's plans to add 1000 new stores - Anthony Mirhaydari
America's fear of competition - Eliot Spitzer (yes, the world's most famous disgraced governor is back and he actually has some decent insights)
Invest in Obamania - Karim Bardeesy (Slate's money gurus go up against Darth Cramer)

No Need to Rush?

For those of us like the four people in our investment club, we view this market like vultures waiting to strike a carcass in the hot desert.

We know there is tremendous value out there in the stock market, and we're excited to start investing with our club's accumulating funds. A number of logistical hurdles still need to be cleared before our club is ready to actually invest in stocks. Some of these hurdles include finalizing the General Partnership, beginning an account with an online brokerage, and perhaps even getting the club accounting software lined up and ready to go.

Some of us are getting restless, viewing this as the best time to buy.

Others of us see no need to rush.

With the recent giant day of layoffs, analysts are getting more and more sour on the 6 and 12 month outlook for the US economy. It can be hard not to when it seems like every other day you know someone who has lost their job. If this is true, there should be great value in stocks in the next 6 months to a year (at the least), and there's no need to rush in quite yet.

On the other hand, the stock market has made many fools out of "bottom timers", people who think they know the exact right time to buy stocks. The end result for these people is that they miss the most important part of the rebound (see mistake number 5).

In the end, I think it's good that our club has a mix of opinions on any subject, and this is no different. The important thing is to ready ourselves should we want to act, and I think we can all agree on that.

Water, water everywhere, but not a drop to drink

After weeks of laziness, I'm finally getting around to reviewing the water industry. Unlike solar energy, which has been promised as the way of the future for several decades now, the water industry has been stealthily sneaking up on everyone and could be a major player in the next decade. Water stocks are typically in two forms, companies that will provide the infrastructure to deliver water to its customers (in the metro Detroit area, we get our water from the city itself) and companies that provide the treatment of water, such as desalinization or sewage treatment.

Some experts see clean, drinkable water as the next commodity to incur global shortages, potentially even scarcer than oil. While water might be something most Americans take for granted, happily sipping our VitaminWater and other bottle water products, in much of the world potable water is hard to come by. In any area where the climate is very hot or arid, clean sources of water are few and far between. And if they become contaminated, either by human waste or parasites in the area, typical in Africa, the quality of life in the region is severely diminished. In most third world countries there are frequent water shortages, and even in places like California, water is often at a premium. Costal cities have plenty of salt water, but current desalinatization technology is expensive and slow.

Enough doom and gloom, how can one profit from the need for clean, potable water? First, and probably the safest bets are on infrastructure companies (that could benefit by Obama being in office) that provide the water directly to the customer. Some examples mentioned in Men's Health BestLife are American Water (AWK), Badger Meter (BMI), Nortwest Pipe Company (NWPX) and the index fund PowerShares Water Resources Portfolio (PHO). The second is desalinization and treatment companies, such as Energy Recovery Inc. (ERI) (there are many more start-ups, but many are privately held at this time).

Note: Most of the information for this analysis came way of two magazine articles, Get Flush With Liquid Assets by Rana Foroohar in the November 2008 issue of Men's Health BestLife and Blue is the New Green by Adam Bluestein in the November 2008 issue of Inc. Magazine. Yes, these both are not finance magazines, but what our club is finding out is that to be a successful investors, you have to know what others don't. Outside reading is a great place to find that information.

The Virtue of Selfishness: Defending Ayn Rand in Tough Times

Cadillac likes to pick on me and instigated another fight. This time he asked me to defend Ayn Rand style deregulation in light of the times. Here goes.

Every individual is responsible for their personal livelihood. The strong prosper, the weak fail. Government must stand aside for the will of its people.

I am not only responsible for myself but also for where I place my money. If I choose to place my money with an entity that is irresponsible and that entity subsequently fails, I deserve to fail with it because I am the bank’s regulator.

Come again, you say? I’m saying banks can’t fail unless we give them money and then turn a blind eye to where it's going. If my bank begins lending a neighbor money at 14 times his salary to buy a house, I should be asking hard questions or moving my money.

Some banks saw the fiscal irresponsibility of the housing bubble and largely eschewed such poor lending practices (Wells Fargo). Those good banks should benefit from relatively prudent money management while the spendthrifts (Bank of America, Citi) should fail along with all who supported them. (www.ajc.com/business/content/printedition/2008/08/22/wellsfargo.html)

Individuals are responsible for regulating banks through collective scrutiny and common sense not tainted by "irrational exhuberance" followed by "helicopter drops" of cash (...thanks Alan, Ben).

And a “bailout” in any form would be facially offensive to Rand. Why? Well, what are we doing with the bailout money right now? Are we supporting the good banks like Wells Fargo so that the banking system arises anew through strength, not greed and irresponsibility? Of course not, let's instead support the weakest, most irresponsible (Bank of America, Citi) so they can buy their friends at Merrill Lynch and we can have a fresh crisis all over again in a few decades.

I believe Ayn Rand would say irresponsible lending practices, not only by banks to individuals, but more importantly by individuals to banks, caused the current crisis. The irresponsible entities on both sides should simply fail permitting better banks in our country to rise strongly and facilitate a more lasting economic recovery where true regulation is guided by citizens, strength, and common sense and not by a lobbyist-infested government. --Schlitz

Building A Better Taco

So Cadillac says it’s great I’m looking for stocks in emerging foreign markets (China, Brazil, Russia, India) but all the stocks I've mentioned are well-known and therefore priced into the market. Potentially good investments still but how can an average investor try and do a little better?

I think back to Peter Lynch in “Beating the Street” taking that first bite of Taco Bell. That experience led Lynch to Taco Bell’s balance sheet and then to Taco Bell's miserly corporate headquarters. Taco Bell would become a mega-bagger for Lynch in his Fidelity Magellan days.

So where's my taco? Some ideas:

(1) Visit Brazil. Perhaps this summer. I’ve always wanted to go and I think it’d be fun to learn Portuguese. Better yet, I’d get a ground view of where newly discovered Brazilian wealth is being spent.

(2) As an engineer, I love to understand cutting edge technologies and generally have a sense of what makes them valuable. I especially like oil, cleantech/nanotech, and biosystems research. So what companies worldwide have the potential for a lasting competitive advantage in any of these areas? Do any of these prospective companies hold an intellectual property edge to restrain competition?

I’ve started some technology research online and I'm also looking at historical trend analyses. More on finding a better taco later. --Schlitz

Renting Vs. Buying

What does renting a home or apartment instead of buying have to do with investing?

First of all, buying a home is one of the biggest "investments" people make with their money. They pay a mortgage, taxes, and upkeep to not only provide themselves a place to live, but to hopefully have a tangible asset that can be borrowed against or sold at a profit.

Second of all, from childhood all of us as Americans are taught that owning a house is the American Dream and that if you rent, you're merely throwing your money down the drain.

What if this was just a misconception?

"Renting Makes More Financial Sense Than Homeownership" by Jack Hough brings to light the other side of the argument. According to Hough, renting costs less and thus allows the remainder of the money to be invested in a historically 7% return (factoring in inflation)- the stock market. Meanwhile housing investments return a shocking 0% after accounting for inflation.

Hough makes a strong case for renting. What does everyone out there think?

The Investment Vig

I'm a numbers guy at heart, a statistical process control engineer, and a poker player who likes to roll dice occassionally. The one thing I hate most are taxes. In casino speak, taxes are called "vigorish" or "the vig." The vig is what casinos take out of your winnings to keep for profits.

Analogously with investments, the vig would be called "broker fees." With that in mind, I chose to open an account with Scotttrade where each trade costs me $14.00. No...$7 you heard. But consider that the only way to get your money back is to sell the stock you bought which costs an additional $7, right? So for me, I discount any investment by $14 on the assumption I'll eventually want to sell. Scotttrade also has a nearby office and great customer service so it's worth the slightly higher vig in comparison to Trade King.

In keeping the vig on my portfolio as low as possible, I figure I need to buy at least $1000 of a single stock at a time. Why? Because buying $100 worth of stock means I gave my broker an enormous 14% of the investment value. At $1000 minimum trades, the vig is reduced to 1.4%, a tax rate I can stomach.

Recent books by Jim Jubak and Peter Schiff have introduced me to agriculture/metals commodities and foreign companies, particularly in Brazil. In starting a personal investment portfolio, I'm looking at the following candidates in no particular order:

(1) BHP Billiton: An Australian mining company heavily ingrained in China's growing infrastructure.
(2) GE: A domestic mainstay banged up by the financial crisis yet ready to support infrastructure initiatives by Obama.
(3) Petrobas Brasiliero: A Brazilian oil company doing amazing stuff with technology that's fun to read about as an engineer. Their NYSE symbol is "PBR" so a must have anyway.
(4) Central European Distribution: Largest vodka producer in Poland and a Jubak selection. Yeah, yeah I've heard it already...do the vodka company before the PBR or the portfolio may get sick.
(5) Vale: Brazilian. Large producer of iron with a great Chinese market share. Other precious metals.
(6) Schlumberger: This amazing French company is trading near it's 52-week low due to slumping oil prices. It's available for less than 9 times earnings. Unreal. I wanna buy SLB right now but I don't know enough about investing yet.

Before I start buying Brazil, there are some dangers to evaluating foreign companies that requires additional research for me. I'll share what I learn in the future. -Schlitz

A review of Crash Proof by Peter Schiff with John Downes.

I can remember Peter Schiff being laughed at on CNBC for his alarmist warnings of American consumerism and the impending housing bubble. This book (Crash Proof) sat on bookshelves with specific warnings of debt securitization and the looming housing crisis before it happened. The principles Schiff teaches in this book are now difficult to ignore.

Schiff’s book details the effects of inflation, U.S. conspicuous consumption, and consequential results in plain speak. He also uses frequent analogies to help the reader along in understanding his viewpoints on inflation and why we as Americans should be paying attention to it.

When Schiff speaks about “inflation,” he’s not talking about the inflation figures that Wall Street and the U.S. government publish. Instead, he’s referring to the continuing devaluation of the U.S. dollar through rampant printing of money by the government to satisfy our unrestrained consumption of goods and increasing debt levels.

Why do we have a national debt and why does it matter? Simply, it’s because Americans like to buy things and say “I’ll pay ya back later.” Countries such as China and Japan are now holding this exploding bag of I.O.U.’s. What happens when China and Japan want to be paid back by people who have no personal savings, large debts, overvalued real estate, high unemployment, and a terribly devalued currency (yeah, that’s us)? The answer can’t be good.

If you’re the SUV guy currently paying a mortgage larger than the value of your home while watching a planet sized plasma TV all bought on credit, this book may not appeal to you or stereotypical notions of what makes the “American Dream.”

If you’re like me, I just wanna protect myself from the SUV guy above who doesn't care and this book is a great starting point even if you don't agree with all of Schiff's ideas. I'll look to contribute more foreign investment opportunities to the group although they may be more complex to evaluate.

Shhh!! Here’s a secret. We can still have the “American Dream” but we actually have to produce and pay for it. --Schlitz

Link'O'Rama (not to be confused with Obamarama)

Calculating Intrinsic Value

* http://www.stock-investment-made-easy.com/calculate-intrinsic-value.html
* http://answers.yahoo.com/question/index?qid=20061120165707AAFjmuf
* http://www.investopedia.com/terms/i/intrinsicvalue.asp
* http://www.streetauthority.com/cmnts/hps/2006/05-12.asp


Dividend Yield for S&P 500 Greater than Yield on 10 Year Treasuries

http://www.fool.com/investing/dividends-income/2009/01/12/the-worst-investment-in-50-years.aspx


Security Analysis

* http://www.fool.com/investing/value/2007/07/23/security-analysis-101-margin-of-safety.aspx
* http://www.fool.com/investing/value/2007/08/01/security-analysis-201-intrinsic-value.aspx
* http://www.fool.com/investing/value/2007/08/21/security-analysis-301-look-for-a-wide-moat.aspx?terms=security+analysis+301&vstest=search_042607_linkdefault
* http://www.fool.com/investing/value/2007/08/23/security-analysis-401-calculating-intrinsic-value.aspx
* http://www.investopedia.com/university/stockpicking/stockpicking1.asp


Discounted Cash Flow

http://www.investopedia.com/university/dcf/default.asp



Many of these articles are from Motley Fool and Investopedia, both great sites for more detailed information on stock picking.

Review of The Little Book of Value Investing by Christopher H. Browne

If The New Buffettology is like Omaha Steaks (everyone knows that is supposed to be good and it is but nothing more), The Little Book of Value Investing is like a steak from Costco (pleasantly surprised as it is way better than what you expect from a place like Costco). A discipline of Benjamin Graham and highly influenced by Warren Buffett, Browne shares his investment philosophy in an easy-to-understand way without coming across as heavy-handed or a pompous jerk. As I understood, he uses Graham's definitions of intrinsic value and margin of safety for investing in value stocks. Here are some main points:

• Margin of safety is defined as stocks offered at 2/3rd (preferably 50%) of intrinsic value, company has a low debt to net worth (1:2 is ideal), and diversify your portfolio with a minimum of 10 non-correlating stocks.
• You want a low P/E ratio as earnings drive stock price.
• You can define intrinsic value using advanced statistical methods (such as discounted cash flow analysis) or by determining what the company would be sold at in a leverage buyout.
• You want a share price that is lower than the book value per share. Even better is a price below the net cash balance.
• Look for companies with consistent profit margins, high liquidity and a high return on capital.
• Get stock ideas by looking at what the top 10% of mutual fund managers are investing in.
• Be sure to invest globally but watch out for differences in accounting practices.
• Look for insider buying (as opposed to selling) as it is a more consistent way to tell if the executives think things are looking up for their company.

Next up The Only Three Questions That Count: Investing by Knowing What Others Don't by Ken Fisher (with a foreward by Jim 'Darth' Cramer).

What do you think of these methods? Have you read the book and have a differing opinion?

Required Reading

The members of our club have spent quite a bit of time in the past two months reading to increase our rather limited knowledge of investing. Here are some books and magazines we have read and feel are valuable to the learning process:

Books
The New Buffettology by Mary Buffett and David Clark - great book to get an understanding of how Buffett picks his stocks. This book includes specific examples and equations which are more helpful than the fluff in many investment books out there.

The Little Book of Value Investing by Christopher H. Browne - I wasn't expecting much but this was recommended on Amazon. Man, was I in for a pleasant surprise. This book is excellent! Browne goes into great detail with his investing philosophy (citing Graham and Buffett many times over) but keeping it simple enough for a newcomer to understand. Highly recommended!

Magazines
Inc. and Fast Company - both magazines talk about the inner workings for small to medium size businesses. Great for learning about trends and new industries.

Arriving Soon:
Harvard Business Review
Financial Times
Conde Nast Portfolio
Forbes
Fortune


Tell us what your favorite business and investing books and magazines are below.

2008 in review, 2009, and random thoughts….

The following is a guest post from Bob Costello (not his real name), a financial consultant in Michigan.

Much could be written about the events of 2008 but in a broad sense, an economy fueled by debt met its limits. As reported in the Wall Street Journal, GDP grew 5.9% annually since 1983 while total debt grew 8.9%. Disturbingly, GDP increased $10.9T and debt rose $45.9T. At the least, a period of adjustment is in order. A new approach to growth will have to be found. Thus far, Washington’s response has been to pour on record debt.

Who knows what the long-term consequences will be, but some thoughts for piece of mind: Currency values are based upon relationships with other currencies. The U.S. is not the only government throwing money at their flailing economy. Also, if Asian currencies appreciate in value relative to the dollar, it will make Asian goods and services more expensive, which is good for U.S. industries.

All things considered, long term, I side with Warren Buffet and agree that we have a tremendous long term opportunity.

In the short term it should be positive for gold, a traditional alternative to “funny money” and financial trickery in general. Precious Metals funds jumped over 70% since November 21 as investors may have pondered the same long term implications.

Most pundits and professionals agree that a well managed portfolio should have at least 10% in non correlating assets. Whether that is REIT’s, commodities, or interest rate plays, take a page out of the Ivy League Endowment playbook and add some non correlating assets.

All the negative aspects aside, odds strongly favor the bear market ending in 2009. After the technical washout that occurred during this past October and November, it would be desirable for stocks and commodities to gradually build a base over the next three to six months in preparation for a sustainable advance. Any improvement in the economy
later this year could help to establish new uptrends that result in meaningful gains before year end. I believe that the worst might be over for stocks and commodities for now—and that worthwhile opportunities could appear later this year.

With the amount of money being distributed by the world governments, a positive reaction seems almost certain. It’s like a man taking an entire bottle of Viagra and then nothing happening…

But you never know!

When analysts get it wrong

One of the analyst's our club often reads is Jim Jubak from MSN Money. Here he discusses why his portfolio did so poorly in the second half of last year. Unlike Buffett, Jubak is a very active trader. He made bets based on what would happen to the economy and was slightly off, losing a good chunk of change. According to the site, he is supposed to be the most read money writer on the web. So I think this confirms that analyst picks are a crap shoot. Also I think it is a good warning to everyone to really do our homework and not get cocky about stock picking. Right now with everything so low, it will be pretty easy to make money for the next year, and one shouldn't get overconfident and continue to learn and invest in an intelligent manner.

Trading Fees & Online Brokerages

An extremely important, but often overlooked area of investing involves trading fees. The best way to view fees associated with your investment is like a tax, and the easiest way to eat up your profits is by exposing yourself to excessive or unnecessary fees. Don't let yourself overpay for common services, and don't let yourself be nickel and dimed. This priciple is talked about extensively in John C. Bogle's book Common Sense on Mutual Funds. Bogle, by the way, is the creator of the Vanguard mutual fund family which is known for its low fees.

One area I've personally seen a good chunk of my profits eaten up is through trading fees. Long ago when I set up my personal investment account, I picked eTrade as my brokerage based solely on the positive things I had read about it. Now don't get me wrong, I love the speed, ease of use, and all the extras on eTrade, but since I recently began investing the money in that account, I've found that trading fees are rather high. At $12.99 per trade, I need to clear $25.98 on any transaction before I even make any profits. This wouldn't be a huge amount if I was dealing in larger amounts of shares and/or money, but at the levels I'm currently trading it is just too much.

As an investment club, we've spotted this as an area that we want to target. We want to minimize the amount of 'taxes' we're exposed to, so we can maximize our profits. I was personally tabbed with comparing a number of the online brokerages that are out there. I initially looked at eTrade, Scottrade, Charles Schwab and TD Ameritrade. Any of these well known online brokerages could have been good choices, but their trading costs ranged between $7-$12.99/trade which would mean we'd need to clear anywhere between $14-$25.98 on any transaction before making a profit. That still seemed a bit high, so we looked at other options. That's when we stumbled across Zecco and Trade King. Zecco offers trades for $4.50 while Trade King offers $4.95 trades. That puts the break even point down at $9-9.90/trade... that's a huge difference when your dealing in relatively small amounts of money or low numbers of shares. While we're currently leaning toward using Trade King due to the positive feedback we've read and away from Zecco due to the mixed reviews we've seen, we haven't yet decided which one we'll pick. It mostly depends on which brokerage may be offering a bonus or other promotions (somebody will be blogging on the topic of bonuses and checking accounts very soon). Zecco might still be an option considering the new promotion for $0 trades with a minimum $2500 balance (http://hello.zecco.com/landing/search/search2/?gclid=COO6u5HJ8pcCFQHHGgod0wcEDg). We'll keep you posted when we decide.

Paul Woodcreek's Personal Portfolio...

With this post I'm opening the books and giving you some insight into what I currently own, my thoughts about these particular stocks, and some insight into the performance to date. So, without further ado, and in no particular order, here we go...

1. Wal-Mart (NYSE: WMT) - Wal-Mart is a good stock in a sector that currently terrible. Retail stocks have been a bust over the last year, but Wal-Mart was one of the few that actually fared well. Aside from McDonald's (NYSE: MCD up nearly 6% in '08) Wal-Mart was the only Dow gainer for '08 (http://online.wsj.com/article/SB123085827075747869.html?mod=googlenews_wsj) with an 18% gain for the year. I see Wal-Mart continuing to flourish in '09 due to a continuing deterioration of the economy. Consumers will continue to seek low priced goods and Wal-Mart fits the bill better than just about any other retailer. Since purchase in early Dec. '08 I've a 6.64% gain on WMT before fees.

2. Caterpillar (NYSE: CAT) - See my Caterpillar post for insights on this stock. Since purchase in early Dec. '08 I've seen a 22% gain on CAT before fees. Not too shabby!

3. Chesapeake Energy (NYSE: CHK) - This stock was one that came recommended to me as a speculative value play and I didn't do much homework on it prior to purchase. Consequently, I bought it at $16.90/share right before some bad news came out and Cramer bagged the stock on his show and my supposed great value plummeted nearly 70%! Not to fear though, CHK is back on the upswing and recently got some good news with changes in how the SEC counts unproven natural gas reserves (http://uk.reuters.com/article/rbssEnergyNews/idUKN3028354420081230). This stock continues to have a huge upside, but it isn't for the faint of heart. Since I bought this one in early Dec. '08, I've seen it down around $9/share and up near $18/share. Currently it is at $17.20/share giving me a 6.9% gain before fees.

4. General Electric (NYSE: GE) - See my General Electric post for insight on this stock. Since purchase in early Dec. '08, I've seen a 6.92% gain on GE before fees.

5. Coca-Cola (NYSE: KO) - Coca-Cola seemed like a good stock to buy during these rough economic times since it offers a fairly recession proof product. No matter how bad things get, people can always find a buck for a soda. So far, that logic has served me alright. Since purchase in early Dec. '08, I've seen a 3.75% gain on KO before fees. Not a huge hitter yet, but still nothing to sneeze at.

6. Skyworks Solutions (NASDAQ: SWKS) - Purely a speculative play based on Cramer suggesting it as such on Mad Money. The stock was beaten down despite being the chip provider for Apple's (NYSE: AAPL) successful iPhone. After doing a little homework on the company I decided to roll the dice and shoot for a nice rebound. Since purchase in mid Dec. '08, I've seen an 18.43% gain on SWKS before fees. I still have this one pegged for at least a two bagger and maybe as much as a two and a half bagger depending on the rebound. I'm planning to sell this one as soon as I get what I want out of it.

7. Manitowoc Co. (NYSE: MTW) - See my Manitowoc Co. post for insight on this stock. Since purchase in early Dec. '08, I've seen a whopping 33.52% gain on MTW before fees!


Total portfolio: All purchase made early Dec. '08 or later. Total return to date is 12.74% before fees.