Monday, November 26, 2007

Tips are bad, mmkay?

Stealth Wealth wrote an article about why he thinks the practice of tipping has gotten out of hand. I agree and further I think the practice has become counterproductive, at least when it comes to restaurants.

Let's look at some of the effects of the current system.

No special service required -- tipping isn't for special service, it's for standard service. People will pay 15% unless service is truly terrible. Unfortunately, people will only pay 20%-25% for very good service. Since 15% is the norm, that translates to a 5%-10% tip for special service... not very motivating!

Quantity over quality -- Going along with the above, there is an obvious emphasis on quantity over quantity. It's generally more profitable (and definitely more of a sure thing) to give good service to 6 tables than to give excellent service to 3 tables. Waiters always tell the hostess "No I'm not too busy, give me the next table!" They will never say "Gee, give it to X, his last table left quickly and I want to continue providing excellent service to my existing customers."

Service depends on what you order -- Have you ever gone out for lunch, by yourself, and gotten something small like a salad with just water to drink? Your waiter's motivation to provide good service is approximately zero. It takes as much effort to refill your water glass as it does to bring that other guy another $4 beer.

Time is a factor -- Want to sit at the table and reminisce with your friends for 2 hours getting free refills all the while? Most people realize that they should tip more in that situation, but few pay significantly more, meaning a 50% tip instead of 25% or 30%. That's why service trails off.

Waiter takes blame for restaurant mistakes -- Most people recognize when a problem isn't their waiter's fault, but some don't.

Stereotyping leads to self-fulfilling prophecies -- If you look like a bad tipper, you will receive bad service, and you will most likely leave a bad tip. Or if you're a regular customer and you frequently leave bad tips, you will get bad service. I think pretty much every restaurant has some groups like that. When I was a waiter, we would seriously try to avoid getting stuck with a certain group of 6 or 7 old women who came in once a week. Suddenly everybody would be taking a smoke break, going to the bathroom, or whatever. It was funny. The reason was that they would all order fairly small meals, only drink water, and for a tip each one would round their bill up to the next dollar.

All of those issues could be resolved by paying waiters a normal wage. People could still leave tips if they received truly exceptional service. Bad service could be addressed by speaking to the manager (which is almost universally more appropriate and effective than not saying anything and leaving no tip).

Saturday, October 13, 2007

Investment update

I thought I'd do a quick investment update. I only own shares in 4 companies right now: AAV, GE, PFE, and JNJ (that's in order of investment size, with AAV being the largest).

AAV has done very well and I have had nice returns both in price and in dividends. With oil so high and natural gas prices heading up for the winter, I'm going to hold this position for the foreseeable future. AAV recently bought another energy company called Sound Energy Trust. This is probably a good move since all of the Canadian Royalty Trusts took a big hit in stock price in the last year (which is why I invested to begin with). So AAV is eating up some of the low hanging fruit, which makes them more valuable in the future.

GE has done better than I imagined, up almost 15%. I wrote before about why I liked GE and some of the issues I talked about have already started to bear out. As the Associated Press notes:

General Electric Co.'s profit rose 14 percent in the third quarter on strong global sales of airplane engines, locomotives and other equipment that have led to a record order backlog.

That's fairly obvious, I guess, but it still is nice to know that I wasn't completely off base. They have over $50 billion in their order backlog, which means they have a pretty safe revenue stream for the next few years. I wonder how big their dividend increase will be this year.

Pfizer has recovered a bit from its low, as I suspected. Recently there have been rumors that Pfizer is going to buy the French company Sanofi, which is the 3rd largest drug company in the world (Pfizer is #1). Well, a lot of people think that's unlikely if only because the French government probably wouldn't allow it. But it seems like Pfizer is definitely looking to buy *something*, which is good since it will give them a future revenue stream once their most profitable drugs lose patent protection. Pfizer currently has about $40 billion in cash just sitting around waiting to be used.

Johnson and Johnson has been rising slowly but steadily. I don't have huge expectations for it since it's a very long term play, and I'm happy so far. One of the silly things I do these days is look out for J&J products at the store. I started using Aveeno shaving cream, which is made by them. When I had to restock on band-aids, I eschewed the store brand for the original BAND-AID brand (by J&J). Every bit counts!

Monday, October 1, 2007

The 401(k) match

I hardly know anything about 401(k) plans because the company I work for doesn't offer them (or any other type of retirement package). But one of the things you hear bantered around the PF world is the "company match." This is typically a scheme where the company will match 50% or 100% of the money you contribute up to a certain total amount of your salary (usually 6% or 3% respectively). People are advised to max out their matched amounts as the first step to retirement savings, followed by an IRA or more unmatched 401(k).

Anyway, what effect does a 50% match have on your savings? It's fairly substantial in the beginning, certainly, but what is the long-term effect? From what I've read, typical 401(k) plans have limited investment choices. Usually you can choose from a mix of mutual funds, perhaps ETFs, and money market funds, but it seems rather limited. Over a 30 year period, how much better do you have to be at investing to overcome the 50% match?

Let's look at how you calculate something like that.

The basic formula for simple compound interest is x = y * (1+z)^t, where t is time, z is your interest rate, y is the initial investment amount, and x is the total at the end.

Well with a 50% match, any y that you invest automatically becomes 1.5 * y. Let's assume that we want x, y, and t to be constant, and we'll see what happens to z. We'll use z for the first interest rate (in the matching 401(k) version) and z' for the second interest rate. Since we're looking for equality, our equation is

1.5 * y * (1+z)^t = y * (1+z')^t

Doing some math...

1.5 * (1+z)^t = (1+z')^t

ln(1.5) + t*ln(1+z) = t * ln(1+z')

z' = e^((ln(1.5) + t*ln(1+z))/t)) - 1

A little complicated. Let's plug in some numbers so we can get a feel for what this equation means. In a short timespan of 2 years (t = 2), if the matched fund returns 10% annually (z = 0.1), our little independent investor would need an annualized return of 34.7% to overcome his disadvantage in not having a match. Over a 10 year period, he would have to achieve 14.5%. Over a 30 year period, he would need 11.5%, a bit easier to achieve.

What does this mean? Well, confirming the obvious, having a company match is a significant advantage in terms of how well your money will grow. However, if you fancy yourself a better than average investor, your 401(k) doesn't provide enough freedom to invest how you like, AND you have a fairly long time horizon, then it may be worthwhile to ignore the company match and make a go of it on your own. As you get closer to retirement age, you would stop your own investments and start taking advantage of the company match. The crossover point could be determined by substituting guessed values for z and z' (based on historical performance perhaps, though remember that's no guarantee of future performance!) and then solving for t.

Friday, September 28, 2007

Equal weight ETFs

Yesterday I explored a new (to me) ETF called the Rydex S&P Equal Weight ETF (AMEX:RSP). The idea is that instead of representing the underlying companies proportionally to their market capitalization, each one is represented, well, equally.

Looking at RSP vs. SPY, the most famous S&P 500 ETF, there are a few things I immediately like. There is a bit less weight given to financial companies in RSP, which is good because at this point I don't really want to invest in them. SPY, on the other hand, has among its top 5 holdings both Bank of America and Citigroup. There's more weight given to sectors I like, such as consumer goods and services, industrials, and basic materials.

Consumer goods is a great sector to invest in right now given the downward spiral of our economy. We should be looking at recession-resistant companies. Consumer goods companies like Procter & Gamble sell essential products like soap and detergent that people buy regardless of how the economy is doing.

I like industrials and basic materials for a different reason -- globalization. Every day, some news comes out about GE's overseas deals. They're building locomotive factories in India, selling jet engines to Dubai, partnering with Japanese companies to build nuclear reactors, selling special furnaces to Chinese steel companies, and on and on. According to GE's Citizenship Report (silly term heh), more than half of their revenue will come from overseas this year. Large industrial companies in the US are in a great position to earn massive amounts of money overseas, especially with the falling dollar. And again with the falling dollar, basic materials companies will find it easier to compete with imports, as well as become more attractive overseas.

Aside from sector allocation, perhaps the best thing about RSP is that their reallocation strategy is more correct. Say a company has a great year and its market cap increases 50% (yay!). SPY will buy more of the company because now it represents a bigger piece of the S&P 500 pie. If the next year the stock goes down a bit, SPY will sell shares. Buy high, sell low -- doesn't sound like a winning strategy!

RSP, on the other hand, will behave better. If the stock goes up, RSP sells shares because it ignores market cap and looks at a fixed percentage. In other words, every company should represent 0.2% (1/500) of the total fund. If a company doubles, it will be above its allotted 0.2%, so they sell shares to bring it back down. Then if the company drops a bit, it will fall below 0.2% and they will buy shares. Buy low, sell high, just what we want to hear.

Thursday, September 27, 2007

A frugalish recipe

A few weeks ago, I bought some Pyrex containers so I could start cooking in bulk and freezing food. Another plus is I can take more complex foods to work, keep them in the refrigerator, and have a nice lunch. Before, I was pretty much limited to sandwiches and fruit.

Anyway, for lunch today I had leftover thin spaghetti, a dollop (or two) of olive oil, and some grated Parmesan cheese. Normally when I have spaghetti for dinner, I toss the extra noodles, but this lunch was so yummy I'll probably do it again. I think the total cost of this meal was less than $1, though it's hard to say because I don't remember how much the cheese had cost. It's truly amazing how much money you can save by bringing lunch, and specifically leftovers, from home. And it tastes so much better than a $5 sub or, even the McDonald's double cheeseburger.

Tuesday, September 11, 2007

My niece's first purchase

Today being Tuesday, Sharebuilder executed my (one-time) automatic savings plan in the new account I set up for my niece. The account now has 2.0738 shares of... wait for it... Pfizer! I know in previous posts I've gone on at length about why I didn't like Pfizer as a stock to own (if not as a company), but they've taken a real beating in the market lately and it looks good to me. The dividend yield is just about 5% and is set to increase regularly. Since I'm honestly planning not to sell these shares for 20 years (think of what the $19.95 real-time commission would do to the profits!), I feel like that gives Pfizer plenty of time to come up with a few great new drugs, raise the dividend significantly, and perhaps buy a few smaller drug companies to stimulate growth.

Speaking of the real-time commission, at some point these shares *will* have to be sold. Therefore my strategy is going to be to invest in just a few securities (some individual stocks and some ETFs) so that each position is big enough in 20 years that the commission won't seriously hurt it.

Since I just opened the account, I was able to participate in a free trial of Sharebuilder's standard pricing program, which means there was no commission on the purchase. However, after this month is up I'm going to have to come up with a strategy to minimize commissions. It will probably involve investing her birthday and Christmas presents together.

Another idea is to use this account for my other niece and nephew rather than opening separate accounts for them. Even though I'll miss out on potential promotions (like the $50 I got for opening this account), over the long run it'll save quite a lot in commissions. The downside is that transferring the shares to them will be more complicated. Well, I don't have to decide now!

A use for margin

Margin is a tool that lets an investor borrow money from his broker to buy stocks. Because you're using borrowed money, you're increasing the leverage of your non-borrowed money. For instance, if you invest $1000 and borrow $500, the total of $1500 is 1.5 times greater than your $1000 alone. That can be good if stocks go up, because you get 1.5 times the profit. Of course, if stocks go down, you lose 1.5 times as much. And in the worst case-, you can lose more money than you invested to begin with because you'll still owe the margin!

Investing with margin can be a dangerous game, much like speculating in real estate. Is there ever a wise time to use margin? Well since I opened a stock trading account for my niece, I've been thinking a lot about investing small sums of money ($50 or so). Let's say that the interest rate on your margin loan is 12% to make the math easyish (margin rates are usually lower).

So, if we're using Sharebuilder, commissions are $4, which means that every time you invest $50 you lose 4/50 = 8%. That's the equivalent of 8 months of margin interest (ignoring compounding), which should tell us there's some probably an equilibrium point around there. So let's look at the total cost of borrowing 8 months worth of investments on margin compared to simply investing each month.

8 months of interest = 8% * 50 + 7% * 50 + 6% * 50 + 5% * 50 + 4% * 50 + 3% * 50 + 2% * 50 + 1% * 50 = 0.36 * 50 = $18.

8 months of commissions = 8 * 4 = $32.

Total amount invested = 8 * 50 = $400

Overhead of margin = 18/400 = 4.5%

Overhead of commissions = 32/400 = 8%

As you can see, despite the huge interest rate, using margin has actually cut our overhead almost in half.

Of course, the other method is to save up 8 months of investments and invest all at once, giving an overhead of only 4/400 = 1%. Now you have to judge whether your investment will gain 3.5% over the next 8 months. Well most people who want to invest are optimistic that the future will always be higher (on average), otherwise they wouldn't be investing! So this actually seems like a fairly wise use of margin. It's something to think about if you are making frequent, small investments!

Thursday, September 6, 2007

Stocks for kids

My niece is turning three this month so I've been spending some time figuring out what to get her. I came up with three options: toys, activities, and stocks. She has plenty of toys already so when I looked through the aisles at some local toy stores, nothing jumped out at me. Does she need yet another doll? I decided not. Activities are a nice gift but she's already enrolled in gymnastics and my mom is getting her swimming lessons. That left me with stocks. I've been wanting to do that for a few years, to be honest, but now I'm finally doing some research into how it's done.

The thing is, what's the best way to give stocks to other people's kids? I guess for most people the easiest way is to give the parents the money and ask them invest it. I sort of tried that already with my other niece (both are my sister's daughters) but my sister said something pretty shocking: She told me she was going to take all the birthday money from everyone and put it towards a sandbox! Maybe that's not shocking, I don't know. I was shocked but my mom thought it was fine.

My sister's in-laws actually avoided the situation by announcing that they had opened a savings accounts for each child and deposited some money into them. At the time (this was before my sister's plan was revealed) I thought, wow isn't that kind of rude and mistrustful? Plus, how wise is it to save $X.00 a year in a SAVINGS ACCOUNT earning 2% interest or whatever, when the money won't be needed for perhaps 20 years?

Anyway, when my sister let slip her intentions for all the money, I realized the importance of being able to maintain some control over your gift. Not to be mean, but I want to give this gift to my niece and not my sister. I'm sad that she doesn't already have a nice little stock trading account with a few years' worth of investments.

So I began investigating what options I had.

The easiest thing is for parents to be involved, no question. Everything I read pretty much assumes that the parents are the ones setting up the account, whether it's an IRA, 529 account, or custodial account.

It turns out that for 3-year olds, IRAs are pretty much out of the question. Apparently the IRS doesn't consider allowances to qualify as earned income, and nobody would believe a 3-year old was a participant in a home business. Then I read that you can actually deposit unearned income in an IRA and pay a 6% penalty on it. Not bad, right? A 6% penalty in exchange for tax free growth! Well then I found out that the 6% penalty happens every year that the unearned income remains in the account, until it's all gone! So IRAs are definitely out.

Section 529 plans are almost an ideal solution to the issue. Anybody can open one and you don't even have to be related to the beneficiary. There are two reasons I don't like them, though. First of all, they're limited to paying for education-related expenses (college). What if she gets a full scholarship and doesn't need the money for college? Then you pay income tax on the withdrawal plus a 10% penalty. Well, paying for college is a really boring gift that is better left to her parents anyway. I'm thinking she can use it to buy a car, start investing, or travel around Europe!

Oh and the second reason is that they are awfully limited in their investment choices. The 529 plan for my state doesn't offer the ability to buy individual stocks. Instead, you have to choose from 12 mutual funds. That's not my style.

Coverdell ESAs (Education Savings Accounts) are similar to 529 plans except that (from what I can tell) only the parents can set one up (though anybody can contribute) and you can invest in stocks. Again, there's a penalty if the child uses the money for non-educational expenses, plus there's the whole thing about the parents having to set it up.

Custodial accounts are generally (always?) opened by a parent of the child. The bad thing about them is that anything you put into the account actually belongs to the child. When they turn 18, they can do whatever they want with it. To me, the ideal time for a gift like this is a year or two after college graduation. That way they have some life experience and some appreciation for money and savings.

Then I read three very interesting things. First, the gift tax exemption is something like $12000 a year, and if you're married you can use both exemptions for a total of $24000. Second, if you transfer shares of stock to someone as a gift, the characteristics such as basis cost and time held stay the same. Third, if you're in a low tax bracket (10% or 15%), the long-term capital gains tax is only 5%! Whoa! So basically, by keeping the stocks myself, I can give her up to $12000 in stock per year and if she sells immediately she only has to pay 5% capital gains tax. Good deal! Of course, I'll have two responsibilities in the meantime: pay taxes on dividends (which won't be huge) and make sure to buy-and-hold (no problem). Plus I have to make sure to give it all to her before she starts making lots of money.

So yesterday I opened up a new Sharebuilder account in my name and used a promotion code to get a $50 gift. Plus, I signed up for a free trial of their "standard pricing" program, which means I get 6 free trades. So I'm taking the promotion gift and the birthday gift and investing in a single stock. I'm thinking about doing the Christmas gift now too, to avoid commissions.

I'm plagued with doubts about whether I did the right thing, though. Is it mean to basically prevent my sister from using the cash as she sees fit? Do I have to get my niece a regular present as well, since a Sharebuilder account statement isn't very exciting? Have I overlooked any important tax consequences of this action?

Wednesday, August 22, 2007

My MOMA Advice

I was tagged by Stealth Wealth to continue Moolanomy’s My One Money Advice (MOMA) Meme. Moolanomy is trying to promote financial responsibility and awareness in our hyper consumption society.

The question: If you can give one advice, tip, or story related to money, what would you share?

My advice is to form habits. It doesn't really matter what they are, but remember there's a difference between forming habits and picking them up (at least in the way I use the words). Forming implies some directed effort, I think, whereas picking up implies that it's all happenstance. Picked up habits are often bad, whereas formed habits are often virtuous. Exercising regularly, for instance, doesn't just happen for many people, it has to be consciously achieved.

Today, a lot of things in the financial realm of our lives can be automated. Many bills can be paid automatically, savings can be deducted from your paycheck, IRA and 401(k) contributions can be made automatically. Those should be taken advantage of whenever possible, but it's interesting that automating your life externally is in a sense a way to avoid forming good habits internally. So even though I make automatic payments when I can, I still have mixed feelings about it because I don't think it provides you with the same benefits.

One of the habits that I'm trying to form right now is checking my mail regularly. Sad huh? In the past I have gone for a month at a time without checking the mail. One time the mailbox was so full that the mailman left me a note saying he couldn't fit any more mail into the box! I think I picked up that habit through classical conditioning -- when I had a lot of credit card debt, going to the mailbox began producing the same sense of dread as opening the mail to find a credit card statement that I felt like I had no hope of paying off.

Oftentimes, a good habit may seem totally unrelated to your finances, but will nonetheless have an impact. For instance, a seemingly non-financial habit I'm trying to form is keeping my apartment clean. This includes taking the trash out regularly, doing the dishes each night, vacuuming, etc. What's that have to do with finances? Well now that it's cleaner, I realize that I used to seek to escape my apartment by going out and doing useless stuff that ended up wasting a lot of money. I would go out to a cafe to have an expensive coffee just to be in a different environment. I went out for dinner a lot because the kitchen was too messy.

Another nice habit is getting up early and having a morning routine. I'm one of those people who, for most of their life, got up at the last minute, threw on some clothes, and always seemed to be a few minutes late. I want to be the kind of person who gets up early, makes a nice breakfast, and has a cup of coffee with the morning paper. Financial benefit: eating breakfast regularly at home will save lots of money compared to stopping at the drive through. Health benefit: well, it's a lot healthier too.

But the main benefit of forming habits isn't the immediate financial payoff. It's that you become a more responsible and balanced person and, I feel, you are more connected to life. In the long run, I think that can have a huge impact on your finances and general well-being.

If anybody wants to suggest some other good non-financial habits that end up having a positive impact, I'd love to hear about them. :)

Monday, August 6, 2007

Bought more AAV

On my lunch break I happened to see that AAV was down about 6%. There isn't any news that suggests a reason for this, but the Yahoo Finance message boards speculate that the sharp drop is due to two factors. First, they speculate that over the past few months, hedge funds have been spending a lot on Canadian energy stocks because of the possibility of quick gains from mergers and acquisitions within the industry due to the depressed share prices. There has been some activity on those fronts, but not as much as was expected. Now that prices have been recovering, they are not as attractive for takeovers, so people are losing faith in buyout rumors. The hedge funds need to sell their shares and take their money elsewhere. Some have suggested that they are facing credit pressures due to their use of margin and leverage. Whatever the reason, there's no doubt that there was a large amount of selling done today.

Anyway, the second factor (according to the boards) in the price drop was that Canada's markets are closed today. This took away a good portion of the support for AAV in terms of buyers. The high selling activity in combination with the low buying activity can only mean one thing -- sharp drops in price.

Who knows how accurate the part about hedge funds is, but on the face of it this looks like another good chance to buy some AAV while it's undervalued. I originally got in even lower than this point, and as it climbed I regretted not buying more shares. Now it seems that I have another chance. To get some fast cash, I sold my entire DUK position. I'm not disenchanted with DUK or anything, but it was either that or GE. I put the proceeds into AAV.

This is one of the two reasons I don't have AAV in my IRA. The first one is that I heard that the foreign taxes on AAV dividends can't be recovered in an IRA (which doesn't bother me right now, but could be important down the road). The second is that it's a pretty volatile stock and that's not the sort of thing you want in a small IRA. My IRA money is fully invested and I can't contribute anything more this year. If a stock drops significantly, I'm stuck just watching it or cutting my losses and selling. As my balance grows over the years (can someone tell me why contribution limits are so annoyingly low, when 401(k)'s and other retirement instruments have much higher limits??? It really stinks for those of us who don't have a retirement plans via their jobs) I will build up enough ballast in the form of bonds and cash that I can invest in riskier stocks. But until then, my IRA will have to be a bit more conservative.

Luckily, I got in just before AAV began a slight recovery. Even if it goes up quickly again, I don't think I'll sell these shares. Instead, I'll take my next few contributions and restore my position in DUK. I'm excited thinking about what my portfolio will look like by Christmas.

By the way, even though it's high summer, with temperatures reaching 100F, Christmas is only about 4.5 months away. Isn't that weird? I need to take a few more trips to the beach this year before the sun is gone. I should also start thinking about budgeting for presents in advance (something I've never, ever successfully done).

Friday, August 3, 2007

Growth estimation formula

I was thinking yesterday of how cool it would be to open an investment account for your kids when they're born and deposit $2000 a year in each one. To figure out how much money they would have after n years on a calculator isn't easy, due to the addition of money each year. In a flash of inspiration, though, I realized that the total growth could be calculated easily if you pad the initial deposit such that the interest earned in the first year equals the amount you would normally deposit. Then at the end, subtract the initial padded amount.

For instance, how much money would your child have at age 20? Well, assuming 10% return, you would need $20k to generate your $2k payment. So we use the simple compound interest formula to get 20000 * 1.1^20 = 134550. Subtract the original 20000 and you're left with 114550. How does this compare to using, say, They come up with 125052, which is pretty close. How cool of a college graduation present would that be?

Is there a more accurate estimation that's still easy to compute? I play these number fantasy games all the time, so any tips would be appreciated. :)

Thursday, August 2, 2007


I was surprised to see that Best Buy had given me a little dividend in my IRA and it's already been reinvested in partial shares. Some bloggers post a nice table of historical dividend returns, and it's really cool to see how (pretty much) each time the dividend gets a little bit bigger. So I'm going to start doing that. At least it'll give me something to post about! Hmm, well since most of my investing money is in Scottrade still, which doesn't have free dividend reinvestment, you won't see the same exciting compounding action. But most of the companies I invest in have a history of raising their dividend periodically, so there will be at least some increase. Anyway, without further ado:


  • July 2007 - $36.51

  • July 2007 - $2.10, reinvested into 0.021 shares

  • July 2007 - $2.00, reinvested into 0.046 shares

  • Coming in September...

GE (Scottrade)
  • July 2007 - $28.00

GE (TD Ameritrade)
  • July 2007 - $5.60, reinvested into 0.139 shares

  • Coming in September...

Wednesday, July 25, 2007

Holy cow batman

On a whim I just logged into Google AdSense and saw that I have actually made some money -- 36 cents! I'm not being sarcastic when I say that I never expected to make that much money with this blog.

The reason I put an ad on my blog was that I was intensely curious what sorts of ads would be shown. At first it was stuff like "Hot penny stocks!" and "This stock is poised to EXPLODE!" and I was rather disappointed. But the other day I saw an ad for a report on Warren Buffet's portfolio. Now we're talking.

Tuesday, July 24, 2007

Rough day in the market

I have to be honest and admit something: I would be perfectly okay with a market crash right about now. Since I only have a small amount of money invested, it wouldn't really have much of an impact on me, but it would be a great chance to get in low with my next few contributions. I would be sad that I can't put more into my IRA, but at least I have some of that in the AGG bond fund (for that very reason).

AAV has been down fairly significantly in the last few weeks and it fell about 5% more just today! That doesn't bother me because I'm still making a good return on it. When I get my next paycheck I'll pick up a few more shares.

I still think that, long term, AAV is a good investment. Canada is obviously going to play a bigger and bigger role in the world supply of oil and natural gas (for America in particular). AAV gets about 1/3 of their production from oil and the rest from natural gas. As it turns out, natural gas plays an important role in the extraction process of oil from Canada's oil sands, so it seems pretty safe to assume that demand for natural gas in Canada itself is going to go up dramatically in the next decade. Unless they decide to build some nuclear reactors to provide heat for the extraction process... but doesn't it take like 20 years to build a new plant anyway?

Well, I don't think the market is about to crash. Hopefully I'm not jinxing it!

Friday, July 20, 2007

Evaluating stocks to buy

In the past few months I've been making two kinds of purchases: very long-term, and mid-term. As such, I've got two ways to evaluate which stocks to buy.

Very long-term

For very long-term buys, like the kind that I honestly don't plan on selling for 40 years or more (if ever), the first thing to decide is what industry to invest in. This depends mostly on what I think is going to happen in the world over the next 20 years or so. Here are a few of my speculations (some of which are pretty obvious):

  • BRIC (Brazil, Russia, India, China) is going to grow. A lot. And a lot of it is going to be growth in infrastructure, simply because they are relatively undeveloped.

  • The dollar is going to start recovering.

  • Chinese stocks are going to fall significantly sometime in the next few years, at which point they will make great investments.

Those are the three I feel pretty sure about. The first one has made me interested in infrastructure companies like GE and ABB. Before I graduated, I had an internship at ABB and was struck by an anecdote told by the vice president of R&D during a meeting. He said they weren't doing too well in India because their equipment was too expensive and complicated. The Chinese, on the other hand, absolutely loved how complex it was and bought it like crazy. I can totally picture that.

Anyway, the second point makes me kind of sad. I want to invest in overseas companies (like ABB) but if the dollar begins recovering, that will eat into my returns. So I want to focus mostly on American companies that do no more than half of their business overseas.

The third point has an obvious strategy -- wait until Chinese stocks fall (if they ever do) and then buy the nice ones.

Aside from those strategies, I currently am a big subscriber to the dividend growth theory: Companies that have a history of paying dividends and consistently increasing those dividends make great long term investments. This is a pretty well-researched area and I feel pretty confident in it. One source of ideas for such companies is Standard & Poor's "Dividend Aristocrat" list. Or you can just think of big companies that have been around for 100+ years and you'll pretty much be right on track.

Only when I've narrowed down my list to a few companies (that match the criteria above) do I start looking at the financial details. The first thing to look at, of course, is the stock chart. You can get a quick overview of how the market has "liked" the company over the past 5 to 10 years. Sudden drops or spikes always require investigation, but the best thing (to me) is a relatively flat graph. To me, a successful company whose stock price isn't going up is like a spring gathering potential energy. Eventually, it will make up those flat years with strong growth years.

The metric associated with this, of course, is the P/E ratio. If earnings have been growing and the price has stayed flat, the P/E ratio will decrease. Companies with P/E ratios below that of their peers, and below their own historical P/E ratio average, are definitely something to look into.

While normally I agree that timing the market is very difficult, I think this strategy is pretty realistic. Since there are so many good companies to invest in, the chances of a few of them being in one of these lull states is fairly good. I think of it as an opportunity to time-travel back a few years and invest. If a company is trading in the same range it was 5 years ago, investing today is equivalent to investing back then.

This option is primarily for new investors, like me, because half the risk of market timing is selling too early. In other words, if you start thinking "Oh GE isn't going to move for the next 5 years, I better sell" then you have a good chance of missing out. Only a new investor can look at the chart and say "Heh I'm glad my money hasn't been sitting idle for 5 years." But since investors typically add new money into their positions periodically, you can still look out for the same things. It's just not as comprehensive since this plan doesn't speak to your existing investments.


The other evaluation method is for mid-term investments. These, to me, are investments that you want to hold for an unknown amount of time, but typically less than a year. I see them more as price goal investments. The main source of these ideas comes from reading about sudden drops in stock prices. Earnings misses, natural disasters, war, anything can cause them. Your job is to do some research and guess at how much of the price drop is legitimate versus investor overreaction. I feel like most sudden drops in otherwise good companies are overreactions and the price will recover in the short term.

For instance, look at Duke Energy. They seem to have been affected by two things in the past few months. First, the recent interest rate hikes, which (I've read) send utility stocks down because of competition with their dividends. Apparently a lot of people invest in utilities for the dividend with the bonus of slow growth, which will probably out-perform bonds. When interest rates go up, people ditch the utilities and go to bonds. Sounds crazy to me but I believe it.

Second, Duke Energy wants to build new plants. Nuclear plants. Investors seem rather terrified of this idea -- whenever news comes out of some environmental group trying to stop them, the stock price goes up a bit. When more news comes out that they were unsuccessful, I think it's fair to say the price plummets a bit. Even Duke Energy's requests for rate hikes don't allay investors fears. I guess it's somewhat sensible for short-term thinkers, given that interest rates may be going up and Duke Energy is going to acquire lots of debt in the next 10 years... but still. Utilities have to expand eventually or what good are they?

I see both of those things as overreactions. I think that when all is said and done, new plants (not just nuclear but natural gas and coal) will give Duke Energy more customers, more revenue, and more profit. Then their price will go up. It's currently hovering around $18, down from $21 earlier in the year. The price drop has pushed up their dividend yield to almost 5%, and I suspect the price will recover as they A) keep raising their dividend and B) get some sweet incentives from the government. Anyway, that's what I hope will happen. :)

Wednesday, July 11, 2007

New stock in my IRA

After writing that last post I decided to invest some of the cash that was just sitting around in my IRA. I added a bit to my GE position and then added Johnson & Johnson (JNJ).

I've been looking for another nice dividend investment for the last few weeks and there are an absolute TON to choose from. Some of the ones I looked at are Proctor & Gamble (PG), Colgate-Palmolive (CL), Pfizer (PFE), and Bank of America (BAC). All of them are nice, big, safe companies with good dividends, dividend growth, earnings growth, etc. Perfect for an initial investment in an IRA, to give it an anchor. I really wanted to invest in BAC but I don't like investing in financial companies. I feel like the economy (in the US and Europe) is too heavily weighted towards financials. When you look at the breakdown of the S&P 500, it's 21% financial services! That's almost twice as much as any other category.

Service economies are one thing (which I also don't really like) but financial services must be just about the worst kind. Is it sustainable if a quarter of your economy is just handling money for the other 75%?

The iShares Dividend Select Fund (DVY), which is a great fund, is over 40% financial services. These companies pay great dividends. I'll probably be adding it to my IRA at some point and that will give me plenty of exposure to financials.

Anyway, I could go on, but I won't. Any of the choices would have been good, but I chose JNJ because I wanted to get some health care exposure and I don't trust Pfizer.

Now I will be patient and not touch my IRA until January, 2008. Unless something bad happens or I see a reeeeally good deal in another company.

Gotta love free dividend reinvestments

Yesterday I noticed my first free dividend reinvestment in my TD Ameritrade IRA. My $2.10 dividend from AGG was converted to 0.021 shares and added to my position. Nice! I was surprised that the dividend was so much, considering I have less than $500 in it. If it keeps up, I'll get about 5.14% per year. Not too bad for a low risk investment. Of course, I'll lose almost all of the interest when I sell it. I'm going to really miss the introductory free trading period when it's over! Maybe by the time I need to pay commissions I'll transfer this account to Zecco.

I was thinking about an asset allocation strategy and I realized two things. First, I probably don't need to worry about it until I have a lot more money in the market. Second, I bet the performance of the strategy depends more on the length of time between re-balancing than anything else. Most of the things I've read say to pick a time period of half a year to a year. It makes sense to use a longish time period because if you re-balance too often you miss out on big moves in price.

For instance, say I have a huge $100k portfolio with 10% in bonds and 90% in stock. Every month for a year the stock goes down 5%, so after 1 year I've got 0.95^12 = 0.54, or 54% of my original investment in stocks (I lost 46%). We'll assume we have no dividends and that the bonds haven't changed. I don't know how realistic that is, because I've heard bonds usually go up if the stock market goes down a lot. Anyway, that leaves $10k bonds + $48k stock. Now the allocation is 20% bonds, 80% stock. Time to re-balance! So I sell $5k of bonds and put that money into my stocks.

Now in a few years, who knows how long, the stocks slowly climb back up to their original position. Maybe they went down even more in the meantime, or bounced around a lot, but we can assume that eventually they get back up there. We still have $5k in bonds, but how much stock do we have? Well at this price level we used to have $90k in stocks, but we added 5/48 = 10.4% to our position while it was low. So now we have $90k * 1.104 = $99k! Yay. This is why asset allocation is good. It forces you to buy low and sell high (we had to sell bonds and buy stocks while they were low to get them back into proportion).

If we had re-balanced too quickly and too often, we would have had a smaller overall return, because the money we took out of bonds would have fallen along with the original stocks. But if the downturn had been shorter, say only 6 months, we would have missed out on the low stock prices. What to do?

I guess the best solution is to ignore time-spans and establish numeric rules for re-balancing. For instance, rather than say you have a 10% bond allocation, you could say you have 5% to 20% bonds with a 10% target (so the limits are half and double, not a fixed number either direction). You only re-balance your bonds if they fall under 5% or rise to over 20% of your portfolio. If it happens in 2 months you do it then. If it takes 2 years, you wait until then.

That range might be too big since basically your stocks would have to fall by half or double to get out of balance. Maybe 7% to 14% would be better? I don't know. It's definitely an art, not a science.

Thursday, June 28, 2007

Best Buy

After selling my AAV, I didn't want to let my money sit around for too long so I started looking for new stocks to buy. After a lot of reading, I stumbled across an article comparing Best Buy, Radioshack, and Circuit City. The author concluded that all three are good buys. I checked them out and, using the wonderful research tools at TD Ameritrade, concluded that the author was pretty much right. As luck would have it, Best Buy fell pretty significantly right before I did this research (last week). So I bought some. I am excited that Best Buy is making forays into China and the news of the stock buyback was of course welcome.

Now my IRA is composed of 20 shares BBY, 20 shares GE, and 5 shares AGG. The AGG is there in preparation for my bond-options strategy, which I'm investigating still. Hopefully TD Ameritrade will be more generous than Sharebuilder with their options policy for IRAs.

Tuesday, June 26, 2007

Sharebuilder's Options policy for IRAs

I applied for options trading in my Sharebuilder IRA account and was approved. However, apparently it is Sharebuilder policy to only allow options "level 1" trading in IRAs. That means you can only "write" (sell) covered calls. In other words, the only thing they let you do is buy, say, 500 shares of GE and then sell 5 call option contracts on those shares. They say that is the least risky options play. BS! Now, granted, if you do not have a lot of discipline, uncovered options can be very dangerous. You can easily lose 100% of your investment on just about every options deal. However, like I said in a previous post, the conservative play is to only invest about 5% of your money in options. The incredible leverage that options provide turn that paltry 5% into a serious investment. The other 95% of your money can be in a safe investment like bonds, getting around 5% interest. That would mean that in the worst case, you lose NOTHING over the course of a year, and in the best case, you get about the same return as if you had been invested 100% in stocks. Just think how useful that would be in times like stock market crashes... just the sort of thing you worry about with your IRA. Because you can't pump a bunch of extra money in if the market goes way down!

Ah well, I'm learning why IRAs need more conservative investment strategies than normal stock trading accounts. I'm just disappointed that I can't play around with the option-bond strategy, which to me sounds like just about the safest possible investment strategy that still gives you some decent return. Ever since I learned about options, I've realized that they are one of the tools of the rich. Little things like Sharebuilder's policy keep this valuable tool out of the hands of small investors. If I had $1 million in net worth I'm sure I could find a broker willing to let me trade any type of option I want in my IRA.

Wednesday, June 20, 2007

Sold AAV today

Well I sold my AAV today. The very high volume (2.9 million shares, average volume 870k!) combined with the slow decrease in price from the morning made me feel too nervous. It's remarkable that it didn't fall more, so maybe I made a mistake. My theory is that a lot of people like me who got in at $10 or so are taking profits, plus the people who got burned by the fall even earlier are saying "Hey let me get out now before it goes down AGAIN."

I thought I'd be getting into this stock for slow growth with a great dividend but it didn't work out that way. Getting the equivalent of nearly 3 years' worth of the dividend in 2 months was too attractive to pass up. I still really like the stock though, so hopefully it will fall some in a big sell-off and I'll get back in! If it doesn't fall within a week I'll get back in anyway. I can't wait until I'm approved for options trading so I can hedge against this sort of thing without dumping all my shares!

Now if I were following deminvest's "free stock strategy" I would have sold only enough shares to get back my initial investment, then kept the remaining shares forever, earning a nice dividend. I like his strategy because it helps you get out of a stock at a good time and not be too greedy. It's also got a mixture of rational trading and long-term holding that is very good.

I haven't come up with a rigorous exit strategy for my stocks yet so I'm just going by my instincts, which may of course be very dangerous.

Tuesday, June 19, 2007

The emergency fund

I've been reading a lot of personal finance blogs over the past few weeks and one of the most common recommendations is to establish an emergency fund. I don't have an emergency fund so I've been getting a little worried about it since I've seen how important it is to others.

On the other hand, I don't fully understand them yet. Most people seem to keep their emergency fund in a savings account, which is one of those "lessons from dad's generation" that I want to avoid. Savings accounts exist to make banks richer after all. If you get one of those high-interest saving accounts, things are a bit better... but still, your money is making more for the banks than for you.

I was thinking today on my drive home from work about what to do. One thought was to keep my emergency fund in the form of bonds in my stock account. Not even bonds, but a bond ETF like AGG or SHY. These funds invest in bonds so they're very very stable. If you look at AGG's chart, you'll see it's varied only a few percent in the last 5 years. In the meantime, it returns a 4.78% dividend, divided into monthly payments. This is better than most savings accounts, except the high-interest ones that can have 5% or even 5.05% (the highest I've seen). So why not do that? Well, the biggest advantage of having it in your stock trading account is equity. It's like a big chunk of gold sitting in your account giving it weight. One day you'll say, gee I want to buy a few shares of XYZ and hold onto them for a few days -- but I have no money! No problem, you can use margin to buy them, and the margin will be secured by your bonds.

An even better strategy is to say, ok I have $2000 in my bonds, so I'll get about $100 interest this year. Therefore I'll buy $100 of options in XYZ! Downside: you make nothing in interest (about the same as keeping your emergency fund in a major bank... I'm looking at you Wachovia!). Upside: you'll make more than 5% overall, maybe significantly more. That's why options are cool, if you use them responsibly. They let you limit your downside (you can only lose your small investment) while having an unlimited upside. Because of the massively high leverage that options provide, combining them with a backbone of bond funds for guaranteed income means that your account will basically never *lose* money but will generally do much better than 5%.

I've been reading about options for a while but have never actually bought or sold them. I am very excited about using that strategy, however.

If an emergency comes up (which should be very rare) you can get out of the bond fund pretty quickly since it's traded on the stock exchange (yay ETFs). From there, a lot of brokerages let you write checks against your account; some even have debit cards. To me, it's no more trouble than going to the bank in person to withdraw, or transferring your emergency fund from the savings account to your checking account online.

I don't think it's the accessibility that defines the emergency fund, but rather the guarantee of availability, which I think this strategy provides adequately.

Strange price movements

Today, AAV and GE both were up over 3% at one point. I thought, "Gee I should sell before they go down," but I stopped myself. Yes, you heard right. I'm already worried about stocks that I've owned for less than 3 months. Some patient investor I am! On the other hand, I did stop myself.

But what is patience? Must a patient man have slow reflexes? I think the most important quality of being a patient investor is to buy and sell based on reason and not on panic.

First of all, with AAV, if I'm up 35% or 38%, what difference does it make? Even if it goes down significantly and I'm only up 20%, is that so bad? I am happy with the stock at these levels and as long as I think AAV can successfully pay that dividend, I will stick with it. I know this will hurt me with AAV because I can see the speculation happening right before my eyes. There's no reason it went up so much in the past week. People are simply gambling that they will raise their dividend or be bought out. New investors are probably getting into the stock in the hopes that it reaches the $20 level it enjoyed not long ago. As a rational investor I want to take advantage of that speculation badly, but as a patient one I will just see what happens. I tell myself, I don't need to make every last dollar; I need to train myself to make good long-term decisions so that when I *do* have a lot of money in the stock market, I won't lose it all.

With GE it's much the same. I have no idea why it moved up today -- none of the recent news seems to justify it -- but I won't let it scare me into selling. I accept that it will probably go down again in a few days. I am in GE long term to make 1000%, not short term to make 3%. Hopefully!

Sunday, June 17, 2007

Lessons from dad's generation

Well it's Father's Day today and of course that made me think about my dad. A lot of people (including me) look to their dads as an example of financial responsibility. He worked hard for his whole life and even though he started off without a whole lot, he's always provided for his family and made it comfortably into the middle class. A person like that can really change the course of a family line's destiny. If I had been born poor, would I have made it as far?

One of the bits of advice from his generation that I'm a bit conflicted about is with regard to debt. They don't like it. Maybe it's a result of *their* parents' generation growing up with things like WWI/II and the Great Depression or just a generally more conservative outlook. In any case, the people I'm talking about are characterized by: making extra payments on their mortgage; putting as much money down for a new house as possible; saving up cash in a special savings account to buy a car with a huge down payment; getting life insurance for their kids when they're like 5 years old.

I see the value in owning your own house, of course. But making extra payments on your mortgage is not good I think! It doesn't reduce your future monthly payment, it just makes the payments end more quickly. If you lose your job or otherwise can't make payments anymore, the bank doesn't say "Oh well you paid extra so we'll let it go for a few months!" For security it would be better to put whatever extra money you would pay towards your mortgage and put it in a high interest savings account. Then towards the end of your mortgage pay it off early if you really want.

With cars, if you can get a special APR from the manufacturer, I think the interest rate is too low to justify putting down more than the minimum. For instance, Honda is having a special right now for APRs from 2.9% to 4.9%, depending on the length of the loan. Hyundai is offering 1.9%. I'm looking for a new car right now so this is an important issue to me -- should I put $5000 down and get a 3 year loan, or put $2000 down with a 5 year loan and leave the remainder in AAV earning a 15% return? I'm leaning strongly toward the latter.

I feel the same way about a mortgage. Rather than pay $200 extra each month, I would stick that $200 in my IRA or regular stock trading account and watch it grow. When you're talking about mortgage time spans, money will REALLY grow. $200 a month has a good chance of being worth more than your entire house after 30 years. That way after 30 years I'll have the house paid off, plus a huge chunk of cash. If I paid $200 extra a month, I'd have the house paid off after maybe 25 years, but I'd have no extra cash. Right now I rent so it's more of a hypothetical issue, but I want to buy a house in the next few years. Wow, I just found a mortgage calculator which lets you test this hypothesis. Indeed, it looks like investing rather than prepaying is the way to go for the situations I tested. Another advantage I didn't even think of is when you prepay you lose a bit of the tax advantage a mortgage gives you, since the extra money you pay goes toward principal and not interest (so it's not tax deductible).

The issue of the down payment is as true of houses as of cars. Let's say you save up for a few years and you expect to get some cash from your parents (and inlaws if you're married). Let's say $15000 total. Then at the last second you say, hey I'm going to just put this money in the stock market for 30 years, and use no money down for the house. Ignoring the ethical implications of re-routing gifted money, what would happen? I don't know. I guess some banks require a minimum down payment so it's a non-issue. I talked to Bank of America recently about the mortgage process and they suggest about 5% down. Let's look at what would happen to the $15k being used on a $120k house in two ways: the minimum down payment and the maximum. We'll assume a 6.4% interest rate (the current average for a 30 year fixed loan according to a Google search I just did). 5% down would be $6k, so the loan amount would be $114k. The monthly payment would be $713.08 a month, for a total payment (after 360 months) of $256,758.80. (Yes, compounding sucks when it's working against you!) With your down payment, the total cost of the house is almost $263k.

In the meantime, the extra $9k that you didn't put towards the down payment has been growing... and growing... let's say at 10% a year (under the long-term average of the stock market, but oh well). We never added anything else and let's say we just put it in an index fund so we never had to manage it or worry about it. After 30 years you would have $157k! So since that money basically came from the house we'll say the net cost of the house is 263k - 157k = $106k. So we got a $120k house for only $106k! Plus the house has probably appreciated since then. Not bad.

Now if we took the entire $15k and put it towards the down payment, what would happen? The monthly payment would be $656.78 and the total payment would be $236k. Add in our down payment and the total cost of the house is... $251k!

So blowing all your cash on a down payment is not a good idea. In this case it more than doubled the net cost of the house. We've also ignored the increased tax deduction that the higher payment gives you, yet another benefit of the first scheme. (But we've also ignored the tax on the investment, which would probably make a huge difference unless it's in a tax-deferred account.)

What I really like about it is that if you lose your job after 10 years and have trouble finding another one for a while, you'll have a nice stockpile of $9k * 1.1^10 = $23k, which, even if it's in a tax deferred account and you pay a penalty to get it out, will definitely give you a nice cushion for those monthly payments.

Friday, June 15, 2007

The search for a discount broker

Summary: Scottrade is bad, Sharebuilder is great, TD Ameritrade is great

When I started investing this time around, things had changed significantly. I used to use Charles Schwab and they charged $29.99 per trade! Now I'm with Scottrade and I have to say... I'm not happy. $7 trades are nice, sure, but all too often their website is frozen for up to a minute. I really mean frozen, not just slow. You click on the "My Account" tab or what have you and it just sits there. No matter what you click, nothing happens. Then a minute or two later, everything works quickly. Their site is never slow, it's either frozen or fast. I've experienced it from multiple locations with multiple ISPs, so I'm pretty sure it's not a problem on my end. It's not a huge deal since I'm not a day trader, but I find it very annoying. I also found it annoying that I sent them a complaint and they never replied, even to say "Only you are having this problem" or something.

The other reason I don't like Scottrade is their lack of an automatic, commission-free, dividend reinvestment program. I was going to open up an IRA with them but that, in combination with one of my favorite stocks AAV, a dividend work horse, stopped me. In the early years, even low $7 trades are going to eat a big chunk out of my IRA's measly holdings. It would also mean that I would have to let dividends just sit there as cash, earning 0.1% interest (gee thanks Scottrade!), until next time I made a contribution. AND it would mean I would have to invest significant amounts of money in the same stocks every year, unless I wanted to forgo share growth in that company.

No, thanks. So I looked around for a more suitable broker. The two I came up with are TD Ameritrade and Sharebuilder. Sharebuilder is, of course, awesome. The $4 trades are pretty much unbeatable, unless you go with a shady startup like Zecco. One problem with their IRA accounts is they have a $25 maintenance fee, but at least you can have that paid from your linked banking account and not from your IRA. The other problem is the "real-time" selling price, which is about $20 -- a bit ridiculous in this day and age. Sure it encourages you to be a long-term investor, but come on. Sometimes you actually do need to sell.

So I went with TD Ameritrade. They have dividend reinvestment with fractional shares, pretty low prices, no maintenance fees, and (I think) better research tools than Sharebuilder OR Scottrade. In fact I like them so much more than Scottrade that I think I will soon transfer my regular account to them as well.

Stocks that I hate


Although my current investments all date from the past 9 months or so, this is not the first time I've been an investor. In college I invested quite regularly. Nearly every day in fact. It was 1999 and making money in the stock market was so easy it was scary. Any company that mentioned biotech in a news report would double in the next few months. Any internet related company would double. I even found a Russian oil company whose stock price fluctuated so regularly that I made money on the ups and the downs. (The company, AO Tatneft, was later discovered to be part of a Russian mob money laundering operation or something crazy. I had already stopped investing by then because it was so freaky. It's disappeared from the stock exchange as far as I know, but I think the company still exists.)

Anyway, a lot of things happened that resulted in my leaving the stock market. I felt like investing had become so psychological that it was too scary to continue. I also felt like investing was somewhat of a waste of time because I only had a tiny bit of money to invest. Doubling a few individual stocks is great and all, but when you only have $500 positions or so, you have to do it *really consistently* to get anywhere. I knew I wouldn't be able to do it for much longer. So I made a little bit of money and quit. I didn't take my money out of the market though. I figured I'd pick a few stocks and let it sit. 2000 was probably the worst possible time to do that! So, that brings me to the first stock I hate:


I like AMD the company because they're A) the underdog and B) they hired basically the entire R&D team behind the awesome Alpha processor, long ago (when I began investing). I think AMD is actually a really innovative company, in terms of technology. I love their HyperTransport interconnect, I love their AMD64 technology, and I thought it was a real coup to get exclusive use of NVIDIA's nForce chipset. And AMD chips were cheap at a time when I needed cheap chips.

As a stock, though, AMD is a DOG. Investors care more about practice than theory. AMD has a long history of failing miserably at putting their technology to work. It centers mainly around production constraints. They can't get big partners (like Dell, etc) because they just can't produce enough chips (on time). They also occasionally get really bad production rates (ie. a lot of the chips fail quality control). They don't have enough money to build a dozen chip fabs to compete on quantity; indeed, they don't have enough money to upgrade their existing fabs to support newer processes (when AMD moves to 100nm, Intel moved to 60nm. When AMD, a few YEARS later, moved to 60nm, Intel moved to 45nm).

AMD's stock success a few years ago was a result of Intel stumbling so badly in terms of technology (the Itanium, and to some extent even the Pentium IV) that AMD started wiping the floor with them. Even though their quantity still wasn't huge, investors couldn't ignore their (slowly) growing market share, especially in scientific fields which the Itanium targeted.

Then Intel said, "Hey guys, we're getting creamed. Let's develop another processor, based on our 10 year old design, the Pentium Pro. We'll also keep developing the Pentium IV, because yes, we can afford having two huge processor development teams." A few years later, their fruits paid off in a major way with the Core series of processors. They have regained the performance advantage and are, of course, outproducing AMD by some huge factor.

Then, in the past year, AMD bought a graphic company called ATI. This was probably a wise move. Intel has been making money off their cheap integrated graphics chipset for YEARS. (It won't play 3d games well, but it's the best selling graphics solution in the world because most PCs only need to display Word and Excel.) Investors didn't like it because now AMD is even deeper in debt.

I really can't say whether it's a good or bad time to invest in AMD. It *could* go up a lot because they will leapfrog Intel in terms of technology. Their upcoming quad-core processors look good. If they can integrate ATI successfully (like having the graphics processor integrated with the CPU) they could do really well.

But in my opinion, investors are just tired of AMD and Intel both. Ever since AMD started competing in high end processors (they used to just be a cheap clone of Intel -- 70% of the performance for 40% of the cost), neither company has as much profitability. Great for consumers, bad for investors. If I had to choose between AMD and Intel for the future, I'd say Intel because it is so big there's almost no chance of it going under. AMD could conceivably declare bankruptcy in a few years if they make even one mistake with their next major processor architecture. (Compare that to Intel, which made several.) Either that or go back to being a cheap clone, losing all credibility.

Since I'm trying to be a smart, patient investor, I don't want to invest in a company that I seriously think could be dead in a few years. Now, if they're not dead in a few years, I am going to seriously consider them again. Processor materials and process advances will probably slow, which will give AMD time to actually catch up to Intel and get some stability in their plants. Stability will hopefully lead to increased yields. They will also be able to justify opening new plants with the latest stable technology. When that happens, Intel is in trouble, because AMD is a much "leaner" company. If they need to compete on tiny margins, AMD has a real shot.


I don't hate ZTR as much as AMD (as a stock), if only because I never expected as much of it and thus I didn't get too disappointed. I have a fairly large (for me) position in it right now because I THOUGHT the large one-day price drop was stock manipulation. ZTR announced a rights offering, which let existing stock holders buy new shares at a reduced price. The price would be the average of the 4 trading days before the offering. I thought, ho ho maybe some big investor has driven the stock down so that he can buy a ton of shares, then it'll go back up. A few days later, it dropped again, and I bought more to get a lower cost average. It dropped again and I thought well screw it. I haven't sold, because ZTR does have about a 10% dividend, even at my entry price. In a year I'll have made back my money and then some. If it goes back up a bit (it does seem to have regular fluctuations) then I'll make out nicely. Right now I'm feeling very wary of it though. It would probably be better to cut my losses and pour more money into AAV... but I really am trying to be a patient investor!


Pfizer is one of those legendary companies with growing dividends that people say, "Put this in your IRA and retire a millionaire." Well when I bought it back in my college days I wasn't interested in a tiny dividend, I wanted some price movement. It moved down. That's when I started hating it.

This time around I thought, hey I don't really have any ideas of what to invest in, let me park my money in PFE for a few months. It lost a couple percent again. Over the past few years (before I was even investing again), I would look at it and say, gee this looks like a good time to invest based on the chart. It generally went down a couple percent within a few weeks, each time. I guess I just don't understand PFE enough to be successful with it.

On top of that, the research I've done lately indicates that PFE could have a rough time for the next few years as its best drugs are losing patent protection and some of its promising future drugs are failing or being recalled. I'm sure that happens all the time for these huge pharmaceuticals, but again I don't know enough about it yet to make a good decision. Now if one day I log on and see that it's dropped on some news story, I might just buy it anyway... but it would have to drop quite a bit!


This is just the tip of a giant iceberg of stocks that I hate, but they're the ones I love to hate. Even though I hate them, I try to keep up with research and trends so that one day in the future we can become friends.

Now let's see what I can do to improve my blog's interface a bit.

Thursday, June 14, 2007

My favorite stocks


My two favorite stocks that I own right now are AAV and GE.


AAV is a Canadian Royalty Trust, which is a special type of company that doesn't have to pay taxes. They are required, though, to distribute their profits to shareholders (or unit holders as they're called). This results in a nice, large monthly dividend.

Well, in October of last year, a Canadian politician proposed that these Canadian Royalty Trusts should be taxed like normal corporations. The share prices plummeted. I read about this in March or so of this year and thought, hey this looks like a good investment. I thought that the price drop was too extreme for the situation -- the trusts keep their current tax status until 2011 -- and the dividends were really nice. In addition, it's *possible* that Canada will reverse this new law, since it might have severely negative effects on their energy industry. Picture dozens of large companies leaving Canada to become American MLPs (another tax-advantaged type of company, but in the US). If that happens, these Canadian Royalty Trusts could return to pre-October prices.

So why did I choose AAV in particular? I looked at many of the largest Canadian Royalty Trusts and honestly I liked all of them. AAV had just made some significant cuts in their monthly distribution, which made its price go down even further. The general sentiment seemed to be that other trusts would have to cut their distributions too, but hadn't yet. This article made me think that AAV had made the right choice in cutting their distributions and now I had a great opportunity to get in while (sadly) the current investors were overreacting and cutting their losses.

Sure enough, it's gone up nearly 30% since I bought it at around $10.30/share. On top of that, I've had a few monthly distributions of about 14¢ per share, which is a bit over 1.3% / month. Not a bad return.

The stock has pretty heavy resistance at around $13, I guess because the newbies who got in are taking profits. I don't blame them, but at the same time, I really don't mind if it stays in the $12 - $13 range, as long as I'm getting that dividend! In the past week, it's broken through $13, perhaps because more people have gotten in at $12 - $13. I bought more shares for my IRA on one of its dip to the middle of that range.

In the future I expect AAV to continue increasing, as long as there isn't another dividend cut. They cut it so much already, though, that I would be really surprised. In fact, there is some sentiment that they will be increasing their dividend, due to higher natural gas prices. (Oh, I neglected to mention that their business is more than half natural gas; the rest is oil.) Natural gas demand is increasing a lot because it is used not only for heating and such, but also in alternative fuel production. Natural gas is used as a source of nitrogen in fertlizers, so increased corn growth (or other crops used for fuels) will result in higher natural gas demand.

In the short term, if there are hurricanes this summer, there's a chance natural gas will spike since imports will be disrupted. It'll take some discipline to sell my AAV in this event, even though NOW I think it would be the right decision. It will probably fall when imports are restored.


Everybody knows GE, of course. As a company, it is pretty well respected around the world as a maker of high tech items like jet engines, as well as "every day" tech like washers and dryers. Of course they do a LOT of other stuff, too. For instance, I learned that GE owns NBC.

Honestly, that is the main reason I want to invest in GE. I like it as a company so I want to be part of it, if only a very small part! The other reason is that looking at GE's stock chart, I think the past few years have not been very kind to it and it's probably time for a change. Looking at the 10 year chart, you can see that, like so many stocks, it started falling in 2000 and started recovering in 2003 (what a great year 2003 would have been to have start investing! ah well). Unlike a lot of respected blue-chip companies, though, GE hasn't even come close to recovering to its 2000 and pre-2000 level.

I've learned that one reason for this is that GE is so BIG that investors find it "confusing." What that means is that if one part of it, like NBC, does extremely well, it has little impact on the stock price because it's still just a small part of the overall company.

I think 7 years is probably long enough that something is going to get done. Sure enough, recently GE sold its plastics division to a Saudi Arabian company for a hefty bit above the value of that division to the company as a whole. Also recently, some stock analyst (I forget which one) stated that if GE were to be split up entirely, the resulting companies together would be worth about $45 per current GE share (which at the time was trading for $35). That's right in line with what I think -- that the "street" has treated GE a bit unfairly and not let the stock price keep up with the strengthening of the company. So I think in the next 5 years or so, GE will have pretty good share price growth as it takes some actions to show shareholders what it's really worth.

Another reason I like GE is the steady dividend growth. I like the idea of long term investing with dividend growth. For instance, if the current dividend (28¢ or so per quarter) increases by 10% or so per year, then in 30 years it will be about $4.80 per quarter! Now of course the stock will have split a few times by then, so it will in actuality probably still be around 30¢ per share, but I'll have more shares. That means that for *today's* investment, I'll be earning about 40% return per year JUST IN DIVIDENDS.

I hear that a lot on websites that talk about the benefits of long term investing in dividend paying stocks, but in my heart of hearts I think it's a big fallacy. After all, the return in 30 years compared to today's investment doesn't matter. In 30 years if I could sell my shares and buy something else that returns 10% a year, it would be better than something that returns 4% a year, right? So in that sense the dividend growth doesn't matter. What matters is the rate of return in terms of the future dollars, because those future dollars tied up in the stock is my opportunity cost for the dividend.

Still, dividends are important. A 4% dividend doesn't sound like a whole lot, but it makes a big difference. If you have a stock that grows at 15% a year, versus one that grows at 19%, does it make a whole lot of difference? Yes: in 30 years, the first investment will have grown 6600%, and the second will have grown 18400%.

Exponents are great because addition of exponents results in multiplication of the results. No matter what your return, if you add 4%, then in 30 years you'll have 1.04^30, or about 3 times as much (hence 18000% vs. 6000%).

Well, this post is getting WAY TOO LONG so I'll stop. Next time I'll write about some of the stocks I hate.

Working on some Javascript

Right now I'm working on a way to have live stock quotes in my blog. When I write a post and want to have the quote shown, I use a tag like <stockquote>GE</stockquote> or <stockquote symbol="DUK">Duke Energy</stockquote>. When the page loads, the Javascript searches through all the <stockquote> elements and composes a list of symbols. It contacts a PHP script on my own web server, which passes the request on to Yahoo Finance. It gets back a CSV list of the data and parses it into Javascript objects. The Javascript then goes back through the page and updates the <stockquote> tags with the price data.

The mechanism is convoluted because browsers don't let you create an AJAX request to other servers. Otherwise the Javascript could request the stock data directly from Yahoo Finance. It sucks, but it works! Here are some samples:

<stockquote symbol="PCU">Southern Copper (PCU)</stockquote> produces Southern Copper (PCU)

Well, Internet Explorer threw a wrench into my plans. I did all my testing in Firefox and was very pleased, but it turns out Internet Explorer doesn't support "fake" tags like <stockquote> very well. I wasn't able to dynamically change the content of the tag. So I've changed it to <span symbol="blah"> and now it works in both!

First Post!!!1

This blog will be about my investments. I will try to be patient over the years and let my money build. I know at some point I will have to take money out to buy a house, or a new car, but hopefully not for anything else!

I've already been investing for about 9 months so I have some positions already. Without further ado:

StockSharesCost BasisMarket ValueProfit

Just a few days ago when the market was down I loaded up on GE and Duke Energy so I'm using quite a bit of margin. It'll be too complicated to constantly keep that up-to-date so I won't try!