How to Invest Your 401k

Last week we talked about the pros and cons of utilizing a 401k, so if you’re still not sure whether you should take the plunge check that article out first.

In this article we will look at some strategies you can take to improve your long-term returns if you have chosen to use the 401k provided by your employer.

Obviously, there is no free lunch.  None of these strategies are guaranteed to produce returns or to work for you.  Some 401k plans have limits on trading that will cut down your ability to actively manage them.  Before you pick one of the below, find your 401k materials and read over it.  Better yet, memorize it.

First, Find Eligible Mutual Funds

About half the time I help friends invest their 401k I go into the exercise hopeful that I will be able to talk about the pros and cons of investing in small-caps vs. real estate vs. a total market index, only to come unglued when the majority of fund offerings charge 2.5% annual fees.

This fee burden will kill any advantage you gain using a 401k.  Over time the loss of compound interest you pay out for the privilege of active, and sometimes even passive, management erodes the tax advantage, the match from your employer and likely even the behavioral benefit of being forced to save.

Set a fee rate hurdle above which you will not invest.  I become wary of funds with fees above 0.50% and refuse to participate in those with fees above 1.00%.

It’s possible doing this will cut out every fund except the S&P index, if that happens you can still time the market and use your 401k as part of a bigger strategy.

Though the provider is required to provide information on the fund, you may find that taking the symbol and typing it in on provides better and more updated info, including the moving average info we will use for trend stats below.

Time The Market

We’ll start off with the most time-consuming, but also most fun strategy. I dedicated the final chapter of my recent book to value-based and trend-based factors that can be used to time markets.  If you really want to get into the nitty gritty, the book is the place.  It’s only $2.99 so you might as well get it.

  • Stocks
    • Value – Use CAPE (cyclically adjust price to earnings ratio) and set a value for buying, holding and selling. For example, you would start buying into the fund when the CAPE is below 12, stop buying in at 20 and sell at 28.  I don’t think the numbers/metric matters a whole lot – you could use p/e or p/book or p/sales.  The key is being consistent and disciplined.  If the market has fallen 50% and everyone is selling but the system tells you to buy, you must buy.  If the opposite is true and your neighbor is bragging about the biotechnology robotics stocks he’s up 300% on you must still sell.
    • Trend – Buy when the market price is above the 200 day moving average and sell when it is below.
    • Combination – Buy when the CAPE is below 20 and the price is above the 200 dma and sell when the CAP is above 30 and the price is below the 200 dma.
  • Real Estate
    • Value – Look at the distribution yield for the portfolio. For those familiar with commercial real estate investing this is the cap rate.  For those who are not, the distribution yield is simply the dividends paid out to you as a percent of the price you pay.  The higher the rate the more undervalued the real estate is.  Buy when the rate is above 4% and sell when it’s below 2%.
    • Trend – Buy when price is above 200 dma and sell when price is below.
  • Bonds
    • Value – Buy when the yield-to-maturity is above 6% (for the definition of this term and many other financials terms, my newsletter has a finance glossary that is updated weekly), sell with the YTM is below 3%.

Create an Effective Asset Allocation Strategy

If you are one of the lucky few with tons of low fee options in your plan you can set the allocations to create a strongly diversified portfolio.  You can ether choose to set the allocations only when the money is invested or you can check up on the portfolio each year and reset the allocations to keep the percentages stable.

The simplest way to do this is to invest equal allocations into each of a stock, international stock, real estate and bond fund.  The majority of plans I’ve looked at have an option in each of these areas.

To get more complicated you can allocate the US stock portion to the small-cap fund which likely has higher long-term returns or to the large-cap funds which will likely have lower volatility.  If there is a natural resource fund of any sort you can adjust the allocations to put 20% in each.

I would recommend avoiding any actively managed funds and, again, the key is picking a strategy/allocation and sticking to it.  If you allow biases and emotions to overtake you at every turn of the market you will end up selling low and buying high.

Using the 401k as Part of an Intelligent Asset Allocation Plan

For those with a limited selection of eligible funds or who simply want to save more than the percentage of income that is sent to a 401k, an ideal way to sue the plan is to invest in the S&P index or the bond funds as part of a bigger portfolio strategy.

For example, if your total savings including brokerage accounts, CDs and the 401k totals $1mm, the 401k totals $50k and you need a 20% allocation to the S&P just use the S&P index in the 401k as part of the that 20%.


Income Sources

Most of my writing on this site has been about investing and trading to this point – and it will likely remain that way for a while going forward.  Despite this, my number on goal at the moment is creating new income sources.

The website will serve as a base for many new income sources (like eBooks, affiliate sales and newsletter products), but there are several possible sources for income that are not directly related to this website or the internet at all (thought I will recount them all here).

The problem is, it isn’t enough to just say, “my goal is to create new income sources.”  The goal needs to be more developed and the new sources need to be pinpointed with legitimate plans to work from.

For now, my base goal is to develop five income sources that produce in excess of $100 per month by the end of Q1 2017.

So to ironically avoid a lame transition to the sub-categories of the article with a lame transition, here are my potential income sources, organized by likelihood of occurrence.

The Cinch

My Day Job

I don’t talk about how much I make at my day job on the site to avoid any issues with the job.  But I think it is safe to say that I make more than $100 per month.

The Very Likely


My girlfriend and I recently moved from a 670 SF condo with two cats to an 1,150 SF townhouse with two cats and a dog.  We saved for about a year to hit the down payment for the new townhouse and since moving have put the money that went toward saving toward the mortgage on the condo while we repaint, make subtle repairs and otherwise prepare it for rental.

According to Zillow, the condo will likely go for somewhere around $1,100 per month.  The mortgage plus HOA is $750 per month and the tenant will be required to pay all other expenses.

Neither of us has any experience with investment properties and long-term we hope to create a real estate empire by increasing our income and saving to be able to move every few years while retaining each of the places where we live.

By March 2017 the condo should have at least three or four months of rental history to draw from and will likely produce profits each month well in excess of $100.

Realized Trading Gains and Dividends

For this category I will add all the dividends with the realized gains from either investments or trades.  Some months will see huge long-term gains and other will see huge losses; over time $100 is a legitimate goal for income from my portfolios.

The dividends do not come each month – most of the time they are paid quarterly.  YTD I have been paid a paltry $175 in dividends in my main account.  The secret weapon, however, is the secondary brokerage account where we saved for our down payment and where all long-term savings goal projects will go.  This account produced total dividends of $305 between January and June this year.  Together the two accounts averaged $48 per month.

This makes the trading easier, with between $2k and $4k earmarked for trading purposes $50 would be 1.25% gain.  Obviously, a 1.25% gain is in no way guaranteed.  In fact, this would be a 16% annual return.  However, as the portfolio grows, I save more and learn more about trading this will become a lower and lower monthly return.

October’s income goal was almost hit with one trade: on 10/4, I purchased $210 worth of Wells Fargo call options after writing about the company in my newsletter.  On 10/12, I sold the calls for $300, booking an $88 gain in just over a week.

The Goals


This is and has been the goal I’ve spent the most time thinking about over the past few years.  The eBook combined with authority website model is attractive to me because I enjoy writing and have proven to myself in the past that I am capable of building a successful website.  Though I was a teenager when I ran my first website, which was a fairly long time ago, that site managed to produce 100k total page views and >$5k of income with no SEO, no affiliate marketing, no eBook writing and very little strategy from myself.

So far I have written two eBooks.  The first had no marketing and has sold something like 30 copies, with two bad reviews.  The second came out a few weeks ago and nearly reached 300 (albeit free) downloads.  I have four ideas for the next book floating around in my mind and will make a decision in the next two weeks which one to pursue.

I will do this by writing an introduction for each and presenting the introductions along with pros and cons of each book to readers.

Affiliate Marketing

I have several affiliates listed on the resources page of the site and work one into the newsletter each week.  So far this has produced a grand total of 0 sales.  Of course, my high page hits day was 35, so I’m not fretting.  I will continue to find more affiliates and continue to find better ways to include them in good content.

Niche Sites

I think of niche sites development as the real estate investment of the internet.  The key here is to develop a high quality website based around a niche that is big enough to lend itself to tons of viewers but is small enough to not have a multi-billion-dollar corporation to compete with.  After production, the site is monetized with the usual advertising, affiliate sales and related products.

I have three ideas for niche sites at the moment and will begin work on one of them soon.

Long-Term Goals

Podcasting, Stock Picking Newsletters and Courses

The three of these are at about the same place in my business model.  All three would not be beneficial to spend time and money on until the site has more traffic.  All three will be integral parts of the long-term success of the business.


At the moment there is no advertising on the site.  For now, I want to focus on creating quality content and not distracting readers with ads that will produce maybe four cents per month.

I will definitely utilize advertising on the niche sites I create and some point I will begin experimenting with them on the main site.  The advertising could simply be banner ads from already established affiliates, it could be google ads or it could be targeted offers in the newsletter based on the subscriber.


I am working toward becoming a financial advisor.  This will allow me to, first, work with friends and family on structuring portfolios and retirement savings and eventually consult with readers of the site.

Long Shots

Uber Driving

I almost didn’t include this one as I can’t really see it happening.  I do want to try it out and at least get to the $100 total mark so I can write about my experience.  I just have too many other things I’m juggling for this to be a legitimate goal.

Lawncare Business

Those who read my book know about my obsession with Lawncare businesses.  I love the work, being outside, listening to tons of audiobooks, feeling the sense of accomplishment.  Really everything about it.  The problem is I don’t have a yard, any equipment or any real leads.  It’s fun to think about though.

Youtube Channel

What could be more riveting than 15 minute videos of me talking about investing stuff?


Top Business Podcasts

During my high school journalism class I became obsessed with Bill Simmons.  So when he started a podcast in May 2007 I started listening immediately.  It was not long before I diversified into fantasy football, politics and (unfortunately) Dave Ramsey podcasts.

I never looked back and today I have north of 25 podcasts that update weekly to listen to while driving, working out or doing something mindless at work.

Here’s my list of podcasts that are in someway related to the goals of this website.  If you have any that I’ve missed, subscribe to the newsletter and email me their names, I’m always looking for more.


The Meb Faber Show

Faber is one of my favorite investing personalities.  He runs several ETFs (almost all of which are in the model portfolios on this site), a robo advisory service, a hedge fund (I think), and has written like nine books and a thousand articles.

His podcast somehow finds a new smart person with a different take on asset allocation each week, and most weeks Faber and his partner answer emails from investors on a second pod.

Invest Like the Best

This is the newest one.  Patrick O’Shaughnessy helps run O’Shaughessy Asset Management which invests based on multi-factor strategies (like value and momentum).  He also runs one of the best book lists newsletters.

His pod is similar to Faber’s, where it does not focus on micro factors of investing like balance sheets or cash flow.  It has, however, been a little more diverse, so far doing interviews on activist investing and the science of investing.

Planet MicroCap Podcast

MicoCap investing is definitely the most exciting of the size based investing silos.  MicroCaps are typically stocks with market caps below $100mm or $200mm.  Where it’s hard for a $100B mega corporation to double in size, MicroCaps have a lot more room to run.

On this podcast great investors ranging from value investor extraordinaire Chris Mayer, to geologists specializing in gold miners to Canadians.

Internet Business

The Smart Passive Income Podcast

As I talk about on the about page, Pat Flynn’s website is the model for my own.  He calls himself an internet business guinea pig and follows through with constant experiments on different niche websites, email providers and website designs.  On his podcast he interviews both internet entrepreneurs and the providers for internet entrepreneurs (CPAs, lawyers, hosting sites, etc.)

EO Fire

Entrepreneur on Fire is sort of the Father of internet business podcasts.  Six or seven of those that I listen to would list John Lee Dumas as their podcasting mentor.  On this podcast he interviews a far range of entrepreneurs from email marketing experts to Shark Tank members seven days a week.

Side Hustle Show

Nick Loper Side Hustle Nation focuses on the micro internet businesses that don’t require 40 hours per week.  On his podcast he interviews people who have made thousands driving for Uber, freelancing on Fiverr or buying discounted products from grocery stores to sell on Amazon and eBay.  Each week has a new profitable side hustle idea.


Tom Woods Show

This podcast is definitely the most political as it leans toward more of a libertarian message than an economic one during election season.  If that’s not your cup of tea, his economics podcasts are second to none on explaining whats currently going on in the economy and how the monetary and banking system works.

Planet Money

Planet Money is economics NPR podcast.  NPR pods almost speak for themselves as they basically all have great stories, production and timely releases.


Now that I’m down to the last one and want to finish the article I’ll just say if you like the type of stuff written about the Freakonomics books, you’ll love the podcast which combines the same type of stories with NPR style production.


401k Pros and Cons

I’ve based my life strategy around fierce independence.  If at all possible, I try to avoid moving with the crowds.  Of course I like the same music, TV shows, sports, movies, clothes, soap, cars, books, podcasts, food, housing, pet options and sleep schedule as just about every other American.  But what does a libertarian have if he doesn’t believe he is an individualist?

Anyway, one of my actual independent actions is my complete disregard for 401k plans.  There are too many better options for my money and I’m way too claustrophobic to hold my money in an account that I won’t be able to use for 35 years.

Unfortunately, as I’ve written ad infinitum, ‘How should I invest my 401k?’ is the most common question I am asked as soon as I identify myself as a former financial wunderkind and a current boring bank employee with an investing website.  So I’ve spent a lot of time thinking about the pros and cons of 401k plans, which we will look at in this article.  Stay tuned next week for the riveting article on how to invest your 401k if you have to do it.

Pro: Employer Match

Perhaps the most obvious pro is when your employer matches your contribution in any form.  At a previous job my employer matched 50% up to 8%, so by contributing 8% I immediately had a 50% return. It takes a lot of potential from alternative investments to beat 50% on day one.

Of course, employer matches aren’t all roses.  Many, if not most, employers require employees to work for a certain amount of time before they get the match.  This can be ten years or more in some instances.  If you’re passing up a 20% increase in income by getting another job or a 3,000% increase by starting a small business for a 4% match, you’re doing it wrong.

Con: Dearth of Investment Options

In a discount brokerage account that takes 15 minutes to setup, the individual investor gets more investment options than there are second rate hot sauce selections in that one aisle in the grocery store.  You can shift from a S&P 500 ETF to Euros one day and into oil stocks the next.  Wherever there is a value or momentum, you can go.

Typically, a 401k plan will have an S&P 500 fund, small, large and mid-cap funds, a growth fund, maybe a value fund, an international fund and, if you’re lucky, a real estate fund.  Don’t forget the 7 bond choices that all have higher fees than their current yield-to-maturity*.

Though there are ways to work around this scarcity, this set-up drastically reduces investors’ ability to invest in the best performing instruments.

*If you don’t know what Yield-to-Maturity is, subscribe to my newsletter!  We have an investing glossary where we talk about finance terms every week. Fun shit!

Pro: Tax Advantages

Though you do eventually have to pay taxes on your 401k, pre-tax income is used.  This either reduces the amount you need to withhold every paycheck or increases the refund at the end of the year.

If you want more freedom and the same tax advantages, a traditional IRA functions in the same way.

Con: High fees

The scarcity we talked about above leads to a movie theatre popcorn affect.  Many 401k mutual funds will charge 1-2% per year in addition to a front-end load (front-end loads are like the cover charge you have to pay to be allowed into the shitty fund) because they know you have no other options.  In a normal discount brokerage account, you can avoid overpriced mutual funds run by a hoity toity brokerage and choose to invest in only ETFs with fees below 0.20%.

Pro: Forced Savings

One of the keys to effective personal finance that I discuss in my new book, is setting up ways to force yourself to save.  This can be accomplished with automatic transfers into a savings account, by building equity in your house or by utilizing a whole life insurance policy.

Because 401k plans pull out of your paycheck before you see it, there is no psychological issue each month with the saving.  There is no fear that you will need the money and no ability to utilize it for better rims on your car or adding a fourth pet to the ever-expanding herd of animals thundering through your house at 2 am.

Con: The Mutual Funds Probably Are Bad

There are tons of studies that I won’t go through the trouble of finding and linking that show the vast majority of mutual fund managers lose out to the market every year (if you want to find these studies check out this book, this one and this one) and almost every single one loses out when you increase the term to three, five or ten years.

This happens for a variety of reasons.  Like 401k plans, mutual funds have limits on where they can invest.  Most can only invest in US stocks above a certain size and they cannot focus too much into one stock.  This, combined with the biases and emotions of human management, spells poor returns.

Guess what?  Most of the time these losers are the funds you have to choose from.

The good news is almost all 401ks have some sort of S&P index you can invest in that has sub-1% fees.  This takes away the human error.

Also, when you can, skip the age based funds that invest based on what year you hope to retire.  These funds are managed based on the inane idea that only age should determine asset allocation and almost certainly have way too high of an allocation in bonds.

Pro: You Can’t Touch the Money for a Long Time

Many investors, myself included, screw themselves over with high turnover. We sell out of a stock that has gained 80% to “secure the gain,” and then watch it increase 400% over the next 3 years.  Or we watch the stock fall 15% in three weeks and rage quit so hard on our cell phone screen when we’re selling it that it creates a tiny dent right before the stock rebounds back past the buy price and up 5,000% over the next decade.

401ks have restrictions on how often you can trade and most providers make it so damn difficult that the best you can do is pick an allocation and then check the performance seven months later when you finally get around to opening one of the statements in an inevitably brutal exercise sure to breed malcontent with investing and the universe.

This annoyance can lead to a positive outcome.  Keeping your wits together, or simply not being able to sell out, during drawdowns is imperative for long-term success in investing.

Con: You Can’t Touch the Money for a Long Time

Because we aim for doublespeak on this site, I’m now going contradict the last point.  In almost all forms of intelligent asset allocation, periodic rebalancing is a must.  Rebalancing is what creates the diversification into uncorrelated assets that gives you a free lunch.  It keeps you from dedicating 40% of your portfolio to resource stocks after a run-up and keeps you from having just 2% of your portfolio in resource stocks right before a run-up.

It’s likely that intelligent asset allocation is not much of an option anyway in most 401k plans.  But the difficulty in rebalancing and moving to cash makes it that much worse to have your money stuck in investing purgatory until you finally turn 59.5.


As with almost everything, the choice on whether or not to use the 401k plan offered by your employer depends entirely on each person’s unique situation.

For people like me with delusions of future business success grandeur or the appetite for actively trading and investing in real estate, 401k plans are a prison that require a fee creeping toward 50% for any withdrawal of our hard-earned cash.

For people who will use their 401k, equity in their residence and various savings accounts as retirement savings, 401k plans are perfect.  They give you an opportunity to invest in stocks that likely would not have arisen otherwise.  And even if the returns are worse than you could manage by spending a lot of time on investing, they’re still better than that the four cents per year you’d get in a savings account.

The hard choice is for those in-between.  You don’t have to daydream about being a featured mogul on CNBC to understand asset allocation and the benefit to diversifying your savings or even creating new income sources.  But this doesn’t mean you have to 4(01k)sake your 401k either.  You can reduce the percentage allocated to it and use its investments as part of a greater asset allocation plan wherein outside accounts are used to diversify into international stocks, commodities, real estate, bitcoin, fine art, baseball cards, a towel that Aaron Rodgers once wiped his face off with, sports gambling, a local car wash business, etc.



The Retirement Book Post



Much of my life has been taken up by time reading anything finance-related I could get my hands on.  Sometimes this is a simple investment book or the autobiography of some famous CEO.  Sometimes it’s the annual meeting notes of a hedge fund manager or the annual report of a conglomeration I’m thinking of investing in.  Recently, it has been blog posts and podcasts on starting an online small business more often than not.

Aside from my own sub-$10k portfolio, a few retirement accounts for family members and whatever knowledge I utilize in my day job underwriting small business loans I haven’t made much use of this habit.  So I decided to take some time to make a plan to put whatever info I have gleaned to good use and try to get rich.

Eventually this turned into an eBook with a fun name: 4 Steps to Retiring a Millionaire (Plus 4 More Steps to get Even Richer).  The book starts with the requisite basic personal finance lessons.  Stuff like compound interest, how to use credit cards and whether you should buy or rent your house.

Most of these things come second nature for those who have had concepts like the time value of money or return on capital beaten into to their brain for four years of undergrad and another year of grad school.  But, if you went to school for English, or engineering or manage the KFC where you started working in high school it’s likely there was never much of a reason to think through how to save money and where to put it.

Next, we go into how to increase your income.  No one has ever become rich (at least not unless it took them 50 years) by savings $12 more per week.  The way you get rich is by creating new income sources and increasing the income you get from your current sources.  This can mean buying rental properties, getting a raise at your current job, starting a lawn maintenance business to run on the weekends or even writing eBooks.  There more income sources you have the better chance you won’t have rely on inflation level raises to retire comfortably.

To complete the first half of the book, intelligent asset allocation is discussed.  Anyone can buy a CD or start a brokerage account and invest in an index fund and the company their uncle works for.  The challenge is creating a diversified portfolio where when the stock market is crashing or even just remaining stagnant for years on end the portfolio continues to appreciate because other asset classes pull their weight.

The next four steps are the exciting ones.  Well, there are three exciting ones and then one about using debt which is more common sense than exciting.

The first is actively investing.  Active investing will be a big focus on this website.  I will track my own portfolio, which has both long-term investments and speculations as well as actively manage a portfolio established in my first book, How to Hack Wall St.  There are people with a talent for active investing who can increase the return they see with smart asset allocation by 50% or more and I discuss some strategies to achieve this.  Unfortunately, these people are few and far between and even worse it takes a lot of work to consistently produce satisfactory investment results – so I also talk about sectioning of portions of the total portfolio to use on different strategies while leaving portions to passive management.

The richest you will get is by starting a successful business.  Unless you are part of the vast minority of people who can command a 7-figure salary (plus stock options) starting a business will create more straight cash than getting a raise, or being frugal, or investing in value stocks could dream of.  I don’t have a secret sauce on starting a business.  If I did my website would look a lot nicer.  But I work with small business owners every day in my day job and can speak to, on average, how and when you should start a business and how to make it successful.

The last section, ignoring the boring how to use debt stuff, talks about timing the market.  This part was the one I struggled with the most.  There are fundamental and technical indicators that help investors and speculators position themselves well in all markets, but none of them are perfect.  I talk about using both but never going all in.  Any market that has gone down 70% can go down 90% before it rebounds.


I will follow an asset allocation portfolio modeled on the section in the book on the website.  You can find that here.

I will also be putting together a market timing portfolio to continue to experiment with the concepts discussed in the book.  This portfolio will be established in my newsletter over time and then added to the portfolio page on the site.


I recommended a helluva lot of books (only partially so I could make the Amazon commission on them if you buy them from this page), here’s the list:

Books to Read for Section 1

The Automatic MillionaireDavid Bach

Master the Money GameTony Robbins

Becoming Your Own BankerR. Nelson Nash

How Privatized Banking Really WorksRobert P. Murphy & L. Carlos Lara

50 Prosperity ClassicsTom Butler-Bowdon

Books to Read for Section 2

Automatic Wealth for Grads… and Anyone Else Just Starting OutMichael Masterson

Seven Years to Seven Figures: The Fast-Track Plan to Becoming a MillionaireMichael Masterson

Choose YourselfJames Altucher

The 4-Hour Work WeekTim Ferris

The Side Hustle Path: 10 Proven Ways to Make Money Outside of Your Day Job Vols 1 & 2 – Nick Loper

Stealth Income Strategies for InvestorsMark Morgan Ford

Kindle Bestseller SecretsDerek Doepker

How to Write for Kindle: A Non-Fiction Book in 72 Hours or Less – Nancy Hendrickson

Rich Dad, Poor DadRobert T. Kiyosaki

How to Write a Non-Fiction eBook in 21 DaysSteve Scott

How to Start a Successful Blog in One HourSteve Scott

Kindle Publishing PackageSteve Scott

Email Marketing BlueprintSteve Scott

My Blog Traffic Sucks! 8 Simple Steps to Get 100,000 Blog VisitorsSteve Scott

Books to Read for Section 4

Global Asset Allocation: A Survey of the World’s Top Investment StrategiesMeb Faber

Fail-Safe Investing: Lifelong Financial Security in 30 Minutes – Harry Browne

The Permanent PortfolioCraig Rowland & J.M. Lawson

The Gone Fishin’ PortfolioAlexander Green

The Ivy PortfolioMebane T. Faber & Eric W. Richardson

The Fundamental Index: A Better Way to Invest– Rob Arnott

Tomorrow’s Gold: Asia’s Age of DiscoveryMarc Faber

Unconventional SuccessDavid Swensen

Pioneering Portfolio ManagementDavid Swensen

When Markets CollideMohamed El-Erian

Berkshire Hathaway Letters to ShareholdersWarren E. Buffett & Max Olson

The Only Investment Guide You’ll Ever NeedAndrew Tobias

7Twelve: A Diversified Investment Portfolio with a Plan – Craig L. Israelsen

Rational Expectations: Asset Allocation for Investing AdultsWilliam J. Bernstein

The Only Guide You’ll Ever Need for the Right Financial PlanLarry E. Swedroe

The Little Book of Alternative InvestmentsBen Stein & Phil DeMuth

Distressed Debt AnalysisStephen G. Moyer

Investment BikerJim Rogers

Investing in REITsRalph L. Block

The Collapse of the Dollar and How to Profit From ItJames Turk & John Rubino

The Golden RuleJim Gibbons

Hot CommoditiesJim Rogers

Profiting from the World’s Economic CrisisBud Conrad

World Dominating Dividend GrowersDan Ferris

Books to Read for Section 5

The Choose Yourself Guide to Wealth– James Altucher

Ready, Fire, AimMichael Masterson

The Reluctant EntrepreneurMichael Masterson

Family FortunesBill Bonner

The Daily EntrepreneurSteve Scott & Rebecca Livermore

The Myth of the Robber BaronsBurton W. Folsom Jr.

How to Be a Billionaire: Proven Strategies from the Titans of WealthMartin S. Fridson

The DriverGaret Garrett

40 Alternatives to CollegeJames Altucher

How to be RichJ. Paul Getty

Ayn Rand and BusinessDonna Greiner

Books to Read for Section 6

The Focused Few – Richard M. Rockwood

The Art of Value Investing – John Heins & Whitney Tilson

The Essays of Warren Buffett – Warren Buffett & Lawrence Cunningham

The Outsiders: Eight Unconventional CEOS and Their Radically Rational Blueprint for Success – William Thorndike

Margin of Safety – Seth Klarman

The Little Book that Still Beats the Market – Joel Greenblatt

The Big Short: Inside the Doomsday Machine – Michael Lewis

Money Masters of Our Time – John Train

A Gift to My Children – Jim Rogers

Invest Like a Dealmaker– Chris Mayer

The Essential Buffett – Robert Hagstrom

Mosaic: Perspectives on Investing – Mohnish Pabrai

Applied Value Investing – Joseph Calandro


Shareholder Yield – Meb Faber

Books to Read for Section 7

The Value of DebtThomas J. Anderson

I Will Teach You to be RichRamit Sethi

Books to Read for Section 8

Irrational ExuberanceRobert J. Schiller

Global ValueMebane Faber

Lessons for a Young EconomistRobert P. Murphy





The Portfolio Post

As your finance guinea pig on of the website’s main functions will be following the portfolios of the various strategies I learn and write about.

As I write this there are portfolios tracking:

  • Hack Wall St. In my first book I developed a portfolio that beat the market over its first twenty months.  Then I published a special report (that you can get by subscribing to my weekly newsletter) that established the portfolio as it stands.  The book and the portfolio follows several techniques to zero in on temporarily undervalued securities.
  • Intelligent Asset Allocation. In my next book I devote a chapter to structuring a portfolio to avoid large drawdowns with uncorrelated assets.  In a recent risk preference article, I developed a portfolios of diversified ETFs that we will follow.
  • My personal portfolio. I have divided my portfolios into two separate sections.  First, are long-term quality companies that I would be fine holding for years (there is a dividend tilt with this section as well).  Second, are options that I trade based on the active trading strategy I wrote about here.

Looking forward I hope to establish portfolios for:

  • Jockey Stocks. I am currently compiling a list of the greatest living capital allocators.  These super-investors have compounded the capital available to them at rates exceeding 15% and sometimes 20% for decades.  This portfolio will be able to hold quality assets in bull markets and shovel up bargains in bear markets.
  • Austrian Economics. This portfolio will be a living oxymoron as Austrian Economists typically don’t believe in the power of predicting macro-economic events.  Nonetheless understanding what will happen to economies and commodities based on the actions of governments and central banks can lead to profitable speculating.
  • Market Timing. Comparing each asset class’s relative valuation to the others allows us to focus on undervalued asset classes.  Only investing when there is a trend in place allows us to make enough money to buy an asteroid mining company when we retire.

Toward an Active Trading Strategy

Earlier this year one of my favorite investment research firms, Stansberry & Associates, created an open house product: for $99 you could get access to all the research, newsletters and trading services the firm offers.

Until this point, I had only dabbled in any sort of technical analysis or momentum trading.  I had read one book about systematically owning the top 100 stocks based on momentum and another about picking value stocks quantitatively and started trying to figure out a way to combine the two strategies.  Thinking being the key word, as nothing had really come of it.

So I eagerly purchased the one-month open house, excited to read all about distressed debt investing, natural resource stocks and their ‘Extreme Value’ publication.  Surprisingly, I found myself hooked on their day trading service within hours.

The Stansberry Short Report sends out a bi-weekly missive with some idea or another, typically based on technical analysis done by Jeff Clark, a 30-year wall St. veteran.  The best part, though, is Clark’s “Direct Line” which he updates almost hourly throughout the day, evaluating the S&P technically as well as sharing any ideas he comes up with.

After downloading the Direct Line app, I became addicted.  I was constantly checking my phone while at work, while walking to lunch, before I got out of bed, in the shower – it was like a money-making version of Pokémon Go.

During the month of the open house (February 2016) my portfolio increased by 15% thanks to my new found trading partner and all the ideas that were funneling in from the other services.

After the month ended and I recovered from the resulting depression, I got a lot busier in my day job and stopped trading for a while. However, when I started up again in June, right after Brexit, I managed to get my portfolio value to go up another 15% in just over a month.

At this point, I decided it would be best to get a trading plan down on paper both to share with readers and to keep myself disciplined going forward.

The trading plan has three parts:  first, we look for assets with a lot of potential energy, or the ability to quickly rise tens of percent; then, we try to figure out when this potential energy will convert into kinetic energy for an entry point; and finally, we utilize deep in the money call options to leverage each trade.

Potential Energy

Potential energy is the field where I am used to playing.  To use it, look for situations in which the market has mispriced a security for some reason or the security just likes to jump into huge trends, gaining tens of percent in a matter of months or even weeks.

We’ll start with the more boring of those two scenarios, value investing.

Undervalued Stocks

Value investing is self-explanatory. You buy stocks that are valuable because they have room to run and when they revert to the mean you will see some good gains.  Here are some good spots to find ideas:

  • The Magic Formula is sort of the original ultra back tested value screen. Joel Greenblatt made 50% a year for ten years with special situations in his hedge fund and then decided to shift into an easier quantitative strategy.  The one he came up with pairs high earning yield (value) with high return on capital (quality).
  • Quantitative Value took the Magic Formula further, adding all sorts of fun bankruptcy and fraud screens to improve the results even more.
  • Morningstar subscribes to the same value ethos, but adds a little subjectivity, employing tons of analysts to analyze their universe of bigger companies to pinpoint those that are undervalued with economic moats, good stewardship and low uncertainty. I like to run the 5-star and highest discount to intrinsic values screens weekly.
  • Gurufocus follows the professional value investors with the best historical returns and pulls out their holdings from SEC filings. I prefer to pick specific gurus and look at their newer holdings, but you can also look for the stocks owned by the most gurus.
  • The big movers or new low list isn’t as easy to name or link here. Many of my better performing trades have come from buying calls when a good company sees its stock cut an unreasonable amount for some reason or another.  In late 2015, Wal-Mart was killed in the markets after a bad quarter and I was able to evaluate the situation, buy calls and then exit up 50% within a few months.
  • Special Situations I wrote a whole book about these so I will leave it to that. Check out the current portfolio for moves I like now.

Assets prone to intense up and down trends

Here’s the strategy that’s lost me shitloads of money at times. I have made more than ten commodity-related speculations that have lost >90%.  I have also made more than ten speculations in commodities that have at least doubled.

  • Gold & Silver Miners are the big one. This year alone I have had six or seven gold miners calls close out over 100% and two or three over 200%.  If you time the trend well, you can make a lot of money really fast.  If you time it poorly and are a slave to long-term macro-economic trends and other gold buggy things, you can lose a lot of money.  For now, focus on learning where to find and evaluate the plays (I like the Stansberry Resource Report) and risk management.
  • ‘Undervalued’ Commodities are full of fits and starts. In my newest book, I have a whole chapter on gauging whether commodities and other asset classes are mispriced and how to time investing in them.  Basically look for a commodity that cannot be produced profitably at current prices.  I used this method to make over 400% on Chesapeake Energy and over 200% on Freeport-McMoran earlier this year.  I also have a legacy position in Cameco from before I used stop losses that is down 90% so pay attention to risk management.

Kinetic Energy

Alright.  This is the part of the equation I was missing for over ten years of my investment life.  If I could get back all the dollars I invested in cash rich but behind-the-times shoe retailers or biotech companies that want to inject bubbles into peoples’ arteries or overpriced (the product and the stock) donut stores, I would have at least, like, $1,000 more than I do now.

Anyway, what we’re looking to do here is read charts to try to figure out when a stock is going to go up for long enough to profit on it.  Many billionaires think this doesn’t work, but billionaires also sometimes consider playing only four men on defense in basketball or sign Greg Hardy.

The theory behind why technical analysis works, as far as I understand it, has to do with psychology.  Assets in a trend tend to stay in a trend.  People like to buy what’s working for them and like to tell everyone about it.

Determining if the stock is trending

We are really only concerned with trending stocks for this strategy.  There are traders who make a living trading in channels.  I actually know a guy who used to pay his rent by buying out of the money calls in big bank stocks when they were two standard deviations below their average price over a period of time, but that’s for another article.  All of the strategies above look for companies with a lot of potential energy and to juice out returns for weeks and months from that potential energy we need the stock to be trending up.

The way I gauge the strength of a trend is the Average Directional Index (ADX).  I’ll admit I don’t entirely understand the math behind the ADX and I’m not particularly worried about ever understanding it.  The developer back in the 70’s looked at the average true range of the stock over a period as well as the distance between the highs and the lows over the period.  When the ADX is over 30 a security is trending.

Alternatively, the old-fashioned way to determine if a stock is trending is by hooking together several highs and lows in a row (at least three.) If the line is up, it’s trending up. If it’s down, it’s trending down.

Determining if it’s an Uptrend

Really it should be obvious if the stock is trending up, but we can make it a little more objective using moving averages.

We will use the 200-day and 50-day moving averages (200 dma and 50 dma), which represent a year and a quarter of trading days.  And if you want to get really fancy, you can use the 20 and 9-day exponential moving averages (20 ema and 9 ema); exponential moving averages weigh the more recent days higher.

For a stock to be in an uptrend, you want the shorter period average to be higher than the longer.  So if you set up a chart to show the 200 and 50 dma and the 20 ema, you’d want the 200 to be lower than the 50 which was lower than the 20 which was lower than the market price.

The logic behind this is fairly simple: if the more recent prices are higher than the older prices, it means the stock has been going up.

Finding an Entry Point

Here are the three main ways we will look for an entry point:

  • The slope of the moving average should always be positive. You want the stock price growth to be accelerating.  When the slope changes form flat or negative to positive this signals the stock will be moving up even faster shortly.
  • Moving Average Crossovers are when (for our purposes) a more recent moving average crosses over a longer one. So when the 50 dma price moves above the 200 dma price.  This signals to the market that the stock is ready to trend upwards.
  • MACD Crossovers. The Moving Average Convergence Divergence (MACD) plots the difference between the 12 ema and the 26 ema along with a ‘signal line,’ that is the 9 ema of that line.  When the MACD line crosses over either the 0 or the signal line it is a bullish signal.  The MACD is just a derivative of the MA crossovers with a shorter time-horizon.

The Instrument We Will Use

Many of these moves offer fairly high risk. To attempt to mitigate that risk with leverage (no one has ever said that before) we will use stock options to trade.

Stock options (specifically calls, which for now is all we will use) give the holder the right but not the obligation to buy a stock at a certain price before a certain date.  For example, if I wanted to buy calls for PayPal (current price of $38) to get the option to buy it at $34 before October 21, 2016 (it is August 9 as I write this) I would have to pay $4.60.  This price is made up of the intrinsic value of the stock, or what you would get if you exercised it today ($38-$34), and time value, which is the remaining 60 cents.  The time value is the value the market gives to the potential for the stock to rise above the current price between now and the maturity date.

You have to buy 100 options at once so the above call would set you back $460.  To break even you need PayPal to hit $38.60 ($34 strike plus $4.60 option price) in the next two and a half months; just a 1.6% return.  If PayPal announces amazing news and jumps 21% to $44, your option would be worth at least the new intrinsic value of $14, turning your $460 into $1,400.  Nice.

Deep in the money calls

Options can be one of three things: in the money, out of the money or at the money.  With calls, in the money means the market price is above the strike price (so there is an intrinsic value), at the money means at the strike price and out of the money means below the strike price (no intrinsic value).  The presence of intrinsic value lowers the leverage in the option.  This seems like a negative at first but with options we will get fairly high leverage no matter what. We are looking for an option that will move about as much as the stock price.  If we bake in too much leverage, a 1% move in the stock will send the option down 25% and we’ll hit out stop loss.

Luckily, there is a way to estimate how much the option price will move as a percent of the stock price. It’s called delta.  We will target a delta north of 0.80 (which means the option price will move 80% of the stock price) and won’t put on a trade without a delta of at least 0.70.  The PayPal options we looked at above have a delta of 0.86.

Another fun way to look at delta is to calculate what is called the position delta.  Because every contract contains 100 options you can multiply the 0.86 delta by 100 to see that you are, in effect, controlling 86 shares of the stock with your option.  This is where the risk management through leverage comes in.  If you wanted to actually buy the 86 shares you would need to commit $3,268 (86*38).

The full-of-potential-energy opportunities we are targeting with this strategy are prone to quick falls and even my four-page investing plan is to enough to be right every single time.  Using an option allows you to reduce your initial outlay and your total potential capital loss while participating in the same amount of potential return.

Risk Management

Stop Losses & Position Sizing

Back to the billionaires.  The business section of the bookstore is full of stories about guys who invested their entire net worth plus some into their business and stuck with it even as the stock price fell 99.9% and they had to write trading tutorials at night to get by.  If you’re Eddie Lampert or Wilbur Ross or even some random laundromat owner, doing those two things can make sense.

If you’re using a leverage derivative to try to get quick returns in the market, you should use stop losses and position sizing.

Position sizing is the easy one.  You should rarely, if ever, risk more than 5% on any of these trades.  Because options will usually have binary outcomes (that is they go up or they go to zero) you should only trade the amount of money you are fully willing to lose forever in that position.  And look at your trading portfolio as a percent of your total, too.  I have something like 70% of my portfolio in cash and long-term value investments.

Stop losses take a little explanation but are also easy.  The most straightforward way to use them is to pick a percent and sell the stock if it ever falls that percent from the highest point it’s been since you purchased it. I like 30%, so if you buy an option at $5 and it shoots up to $8 your stop loss is now at $5.60.

You can also use what is called a free ride and loosen up your stop after.  In a free ride you sell half the position when it doubles.  This means no matter what happens, you get your initial outlay back.

Watching the Bid/Ask spread

When you buy an option you aren’t really buying it from the person who owns the stock.  That person likely sold it to a third party called a market maker who will then sell it to you.  The market maker makes money based on a bid/ask spread.  The ask is the price you have to pay for the option and the bid is the price the seller gets.  So if the bid on a contract is $2.00 and the ask is $2.50, then the bid/ask spread is $0.50.

This one has killed me a couple times even when I may have made a good decision.  I bought puts (opposite of a call) on Brazil a few weeks ago because I read an article saying country stock markets historically peak right before an Olympics.  The market has since risen 6% and my options have fallen 30%.

I don’t remember the exact numbers but the bid/ask on this trade was something like 2.05/2.65.  This meant after buying the option I was immediately down 23%.  We use the market price for our stop losses, which is equidistant from the bid and the ask most of the time, but even then the position opened down 12% (even more when you count the commission) which was too much of a hurdle for the flimsy reasoning I employed on my buy.

Putting It All Together

Even though you’ve read this treatise, I wouldn’t suggest going out tomorrow and filling your portfolio with options.  The first thing you should do is explore all the potential energy sources and make a watch list of 10-20 stocks.  First, find names that you know (stores where you shop, websites you use, firewalls that thwart your hacking, etc.) and track their charts.  When they hit a potential entry point, find a deep in the money call and write the price down.  Over the next few months pay close attention to the price of the option and figure out what your return would’ve been had it been a live trade.

Some Books to Read

Quantitative Value

I spoke about this book earlier.  Suffice it to say it’s easily the best $85 (only $54 on amazon through this link!) investing book I’ve ever read.

Trading by Numbers

Luckily, I found this one at the library, as it is also irrationally expensive ($75 list or $41.60 on amazon through this link).

Swing Trading for Dummies

Just reviewed this one!

Intelligent Option Investor

The Intelligent Option Investor may be my favorite book of 2015.  The author has two tiers to his strategy: finding value and using option strategies to profit from the reversion to that value.  Sound familiar?  There are also a lot of cool charts you can make to use the volatility implied in option prices to see where the market thinks a stock will be in the near future and then compare that to your value.  If you don’t think that sounds like a great Friday night, then I guess you’re not interested in being rich.


Book Review: Swing Trading for Dummies

In my voyage to teach myself active trading I figured one of the best places to start would be a “for Dummies” book, so here’s my review of Swing Trading for Dummies.

Note that most of this book is about technical analysis and I cannot reproduce the charts used in the book.  This summary is best used by somebody who will read the book and use it to call back to the knowledge gleaned from the book.

Defining Swing Trading

The author defines swing trading as a strategy that is markedly different from both day trading and buy-and-hold investing.

Where day traders sell out of their entire portfolio daily to not be affected by opening gaps up or down and pick trades based on intraday technicals, swing traders will hold their positions for weeks or months and will allow fundamentals to have a material impact in the trade decision.

Where buy and hold investors will focus on creating a diversified portfolio that can pull through any macro dips, swing traders will try to trade around the dips: buying when the market is going up and shorting when it is going down.

Enter and Exit Using Technical Analysis

There are two steps to technical analysis

Reading Charts

  • The four main chart types are:
    • Line charts simply connect the dots from one price period to another, typically using the closing price
    • Bar charts show the open, high, low and closing price of a security on that day, distinguishing which if the stock open or closed higher with a line protruding from the bar
    • Candlestick charts show the same thing as bar charts but distinguish whether the open or close was higher by the color of the bar
    • Point and figure charts use X’s to represent up movements and O’s to represent down movements
  • Prices where sellers outnumber buyers and the stock seems to hit a ceiling are termed resistance
  • Prices where buyers outnumber sellers and the stock seems to hit a floor are termed support
  • Prices typically move through four phases:
    • Accumulation, a channel of shifting between support and resistance with light volume because wall street generally thinks the security is priced correctly.
    • Expansion, is when the stock trends up. This typically starts with a higher than normal volume day and is signaled by the support transitioning into the resistance
    • Distribution, follows the expansion phase. Institutions are starting to take profits and volume is starting to taper off, but general interest in the stock from its price run-up keeps the price in a channel until…
    • Contraction, is when all gains developed during the expansion are given back. Short sellers should use temporary rallies as entry points during the contraction period.
  • The head and shoulders pattern is marked by three sequential highs with the middle high being the highest (think a stock hitting $8 and then falling back, $10 and then falling back and then $8 again). This typically signals a down trend.
  • The cup and handle pattern is the opposite of the head and shoulders pattern
  • Trend lines are drawn by connecting highs or lows together. If three connected together create a straight line the stock is likely trending.

Learning Technical Indicators

  • The first step is learning whether or not the security is trending: if you use an overbought indicator to short a security in a strong uptrend you will get burnt.
  • Use only a few indicators and stick to them.
  • The best signals to enter or exit a stock are when the technical indicators diverge from the stock price.
  • The Average Directional Index (ADX) will show if a security is trending or not. Readings above 30 show a security as trending and readings below 20 show that it is stuck in a channel.
  • If a security is trending use the following indicators
    • Pick a moving average and enter when the slope changes from flat or negative to positive and vice versa
    • Buy when a short-term moving average crosses over a longer-term moving average
    • Use MACD to buy when the MACD line crosses over its 9-day moving average, the zero line or when there is a divergence from the stock price
  • If a security is not trending use the following indicators:
    • Stochastics compare the current price to a range of recent prices. Trade when the stochastics action diverges from the price action (e.g. the stock hits a recent low but the stochastics do not).
    • The relative strength index is range bound between 0 and 100. Above 70 equals overbought and below 30 equals oversold.  You can also trade when a stock hits a new high or low that is not confirmed by the RSI.

Use Fundamental Analysis to Pick Stocks

  • Wait until after a quarterly report to trade so that the results are baked in and there are no surprises
  • Analyze the balance sheet to determine financials strength
    • Look for companies with large cash and working capital balances
    • Look for companies that do not have a lot of debt compared to equity
    • Be wary of large increases in inventory or accounts receivable
  • Assess the income statement next
    • Compare sales growth rates to net income growth
    • Look at margin trends
    • Watch for dilution from share growth
  • Focus on wide moat companies with high insider ownership
  • Wait for catalysts
  • Value the company either by comparing it to peers or deriving value from only its own cash flow or book value
  • Screen stocks by value metrics to look for opportunities

Manage Risk

  • Limit position sizes by percent of capital or risk level. Don’t invest in a stock that could decrease total capital by more than 7%
  • Create stop losses based on a trailing percentage or a time period

Some Book Lists

Intro to Investing

One Up on Wall Street

Beating the Street

Essays of Warren Buffett

Motley Fool Million Dollar Portfolio

The Manual of Ideas

Special Situations

You Can Be a Stock Market Genius

Super Cash

Trade Like Warren Buffett

F Wall Street

Intelligent Option Investor

Personal Finance

I Will Teach You to be Rich

Choose Yourself Guide to Wealth

Money: Master the Game

Rich Dad, Poor Dad

The Value of Debt



Economics for Real People

Economics in One Lesson

Basic Economics

The Politically Incorrect Guide to Capitalism

Natural Resource Investing

Profiting From the World’s Economics Crisis

Investing in Resources

The Collapse of the Dollar and How to Profit From


Crisis Investing

The Goldwatcher


Zero to One

The Lean Start-Up

The 4-Hour Workweek

Ready, Fire, Aim

How to be a Billionaire

Business History

The King of Capital

Money Masters

The Outsiders

The Vulture Investors

Too Big to Fail


Sam Walton: Made in America

The Snowball

Plain Talk

The Goal

How to be Rich

Advanced Value Investing

Quality of Earnings

Active Value Investing

The Investment Checklist

Applied Value Investing

Margin of Safety



The How to Hack Wall St Post


After years of gobbling up any special situations investment research I could get my hands on I decided to try my hand at writing a short eBook about them in 2014.

Special situations, in my definition, are any type of unorthodox investment or speculation where there is either an inherent catalyst (like in merger arbitrage) or some sort of market mechanism that unfairly undervalues of company (like in spinoffs).

As a high schooler I dreamed about the days where I would spend all day in an office at a hedge fund reading bankruptcy filings and modeling recapitalizations to try to eke out some value where no one else cared to look.

While I’m sure some poor soul is doing that 80 hours a week right now at Baupost, my own special situations strategy has evolved to one that targets more simple situations and spends as much time figuring out how and when to invest as why to invest.

The intention of this eBook was to explain the strategies I have used the most with case studies and develop a model portfolio.  The book is in no way a textbook and at times may be lacking in financial jargon or space wasting explanations.  However, I firmly believe that for $2.99 it is one of the best ways to get an introduction to Special Situations and start to learn the way to think about investing unconventionally.

The situations I wrote about included:

  • A unique corporate event where-in a subsidiary of a bigger corporation is “spun-out” to shareholders, for free. Typically, this event follows mass selling by large institutions who do not want to or cannot take the time to learn about the new subsidiary – this selling drives the price down, likely well below a true intrinsic value of the company.
  • An arbitrage in the shares of a thinly traded subset of popular exchange traded funds.
  • Piggy backing on the actions of hedge fund billionaires and benefitting when they find an undervalued company and shake it up to release value.
  • The kind of deep value that you would not want your mother to know about.
  • Utilizing long-term derivatives to juice the returns of an investment in an otherwise boring blue-chip stock.
  • How to literally strike gold with ultra-small cap gold mining “juniors.”

About that Model Portfolio

As I write this in July 2016 the model portfolio has just outperformed the S&P over the twenty or so months since its origination: 7.8% to 6.4%.  Though the total return is not very exciting the individual position performances are with six of the nine positions moving at least 30%.

The Sold Positions

  • The Apple LEAPS were the first position to sell and they performed wonderfully as Apple reverted to a better valuation (it has since retreated back to being mildly undervalued). The LEAPS were purchased for $11.26 per contract and sold for $23.60 per contract turning the $1,126 minimum investment into $2,360. Nice.
  • Starz was touted as a John Malone vehicle that would likely sell in the open market for much more than its current price. We paid $31/share and it jumped up to $46 over the next six months – close to a 50% return.  It is very possible that in a more actively managed portfolio I would’ve sold the stock then.  Unfortunately, we sat on the position and the price collapsed to $21/share before, you guessed it, someone offered to buy the company for much more than the market price: $32/share in July 2016.
  • Gazprom and Richardson Electronics were the two deep value picks – both traded for extraordinarily low valuations. Gazprom (Russian oil giant) was massacred by the drop in oil prices and we stopped out of the position with a 37% loss – about $740 in the $100k portfolio.  Richardson Electronics drifted down to $7/share from $9.93/share where it was purchased to stop out at a 30% loss.  For what it’s worth, Richardson now trades for about two-thirds of its net asset value – sometimes stocks that look like values are just value traps that won’t ever rise out of the hole.  In the future I will look to pair momentum and trend following with the deep value picks to better avoid the value traps. All in all, our strategies of using small position sizes and stop losses protected the portfolio when both of these stocks dropped 30% or more; the total impact to the portfolio was a drop of just 1.4%.
  • FTD Companies, Inc. was another big loser who joined the 30% loss club. Following an acquisition, the company lost $80mm in 2015 and now trades for 50x TTM EBITDA.  It’s possible there is still a case to be made that the company will get its cash flow margins back to pre-merger level, however in this portfolio we are looking for easy, catalyst-based, decisions and right now FTD falls into the too hard pile.

Current Positions as of July 2016

  • Biglari Holdings and Third Point Re are the two activists. Biglari is up 16% and Third Point is down 16%.  Biglari’s back of the envelope valuation still looks low: $350mm of cash and investments net of debt make up just over a third of the $870 market cap – when you back them out the company trades for just 8.7x FCF.  Third Point’s Dan Loeb recently called the first quarter of 2016 one of the most catastrophic quarters in hedge fund history.  Meanwhile his fund lost 2.3% in the quarter and 1.4% in 2015 – not huge losses but when a company trades based on the performance of the portfolio these losses will kill it in the short term.
  • Silver Wheaton and Sprott Gold Miners ETF were up 55% and 73% respectively. We have entered into a potentially long-term gold and silver up trend and these two positions should power the portfolios performance going forward.

For more on the current structure of the portfolio please visit the portfolio page and for more details on the current position, subscribe to my newsletter where I update the portfolio once monthly.

Books Recommended

If you click on these links to buy the books I recommended I get paid a commission and you’ll learn a lot and become rich in the long-term.  So best of both worlds.

You Can be a Stock Market Genius is definitely the investing book I have read the most times. Though, strangely, I have still read it probably only a fraction of the times I have read several different fantasy novels. This likely spells disaster for my future investment returns. Anyway, Greenblatt goes over a bunch of strategies he used in the 80’s and 90’s to take the market out behind a dumpster a shoot it.

The best part isn’t learning the strategies and then picturing yourself diving into the pool of gold coins you will soon be able to accumulate after reading the book it is the way Greenblatt recounts the events surrounding his best investments using the strategies. It’s still one of a very few investment books that became a page turner for me.

One Up on Wall St. & Beating the Street

Peter Lynch books are not typically included in lists of special situations books because he is mostly a story stock investor – finding where consumer demand is strongest and finding a way to profit off those names. I do, however, really like the way Lynch divides up investment opportunities, talking about spin-offs, turnarounds and all his different categories. He’s also pretty good at telling stories, like Greenblatt, this falls into the page turner list. When I was 13 I got through a nine hour bus ride in Wales or England or something (didn’t know it would take nine hours to go through the entire country) solely by reading this book. So that’s somethin’.

How to Trade like Warren Buffett & SuperCash 

James Altucher has successfully transitioned into a self-help guru since these books came out. I think he’s a millionaire now, thought I’m not entirely sure he has actually come out and talked about his  net worth anytime lately – he prefers to talk about the millions he has lost in the past – and that’s what we’re going for on this site. For whatever reason he dislikes these books now and has talked about just throwing away all his copies. This is not a great argument for you to buy the book I know (though you should buy it I’ll get like $4ish if you do), but I do still like the books.

How to Trade Like Warren Buffett goes through several special situation strategies Buffett has used in the past to make money when the stock market isn’t lending itself to traditional value investing and then Altucher interviews Zeke Ashton and Mohnish Pabrai both of whom I have a lot of respect for. Supercash is similar but for hedge funds. Both books are more a collection of 10-20 page articles than a coherent book, but I like them more that way and have read each chapter probably 7x but never either of the whole books in a row.

Manual of Ideas

John Mihaljevic is ultra smart and puts more work into his monthly newsletter  than I do annually, probably. I mean, seriously, they’re all like 100 pages. Mihaljevic does a great job taking complicated investing strategies and explaining how they work in an easy to understand matter, which is perfect for most people, including me. This book goes over the traditional value investing in quality companies and cigar butts angles and then talks about special situations, investing in equity stubs, international stocks, small caps, etc.