Portfolio Update: Whole Foods, Under Armour, Tesla

It’s been a while since I did a portfolio update, and there has been enough interesting news this week to do one now.

Hack Wall St. Portfolio – Buy Whole Foods and Sell half of Third Point Re

The portfolio looks like it is generally doing well.  Seven positions have 15%+ returns and one has more than doubled.  Unfortunately, old losses and a being down over 20% in Third Point Re put the portfolio at an 11% gap between its return and the S&P.

So, this week we’re going to cut the Third Point position in half to raise cash for Whole Foods.  Somehow, even down 23.5%, Third Point is still 15% of the portfolio.  We will use the 7.5% of it and some of the cash to make a new 10% position.

I wrote about Under Armour in the newsletter last week (reprinted below) and the problem with owning great companies that are always seemingly overvalued.

Whole Foods has historically been one of these companies.  Its margins and returns are far higher than any other grocery because it can charge more for its organic and otherwise “healthy” food.  Pair that with its intense growth in developing new stores and buying out competitors and its stock price rose from a split-adjusted $5.60 at the turn of the millennia to over $63 in 2013.

That was the high.  Since then, normal grocery stores and the WalMart/Targets of the worlds have added substantial organic choices to their stores and Whole Foods’ growth has stumbled and then finally, over the past year, has gone negative as far as same stores go.

This past week, Jana Partners, an activist fund, announced that it had built an 8% position in the company to attemot to aid a turnaround and eventually enocurage a potential sale of the business.

After a boost from the annoucnement, Whole Foods trades for about 7.5x EBITDA; it would not be surprising for a buyer to pay 10-12x EBITDA or more.  A prominant fund manager I respect values the company at at least $40 right now.  A turnaround that make the company more profitable and potentially higher valued could bring even more gains.

Market Timing Portfolio – All Good; Asset Allocation Portfolio – Meh

The market timing portoflio continues to ax murder the makret – with a 11.5% relative to 6.4% from the market.  Short bonds is the only down position.

The asset allocaiton portoflio is still slumping, up just 1.1%.  Down positons in real estate and commodities have killed performance.

Stocks for 2017 – Endless Tesla Madness

It seems I am destined to structure portfolios with mostly good performers and a few stinkers that kill everything good in the world.  In the Stocks for 2017 portoflio a 43% gain in Tesla (which we are short, so that’s bad) and a 27% loss in Fitbit are dragging down the returns.

A Business Insider post this week higghlighted the insanity of Tesla’s current valuation.  Its valuaiton has now eclipsed both Ford and GM – despite the fact that it has delivered 76k vehicles in 2016 for revenue of $7B and an $800MM loss, while GM has delivered 10mm vehicles for revenue north of $150B and almost $10B in net income and Ford has hit 6.5mm vehicles, $151mm revenue and $5mm net income.

The article says the stock is not valued on these current numbers but the (fantastical) possibilities of what the company could do.

Tesla has a reckoning coming at some point, we may, unfortuantely, get stopped out before it happens.

Personal Portfolio – Under Armour Shenanigans

For the most part, I am rarely able to invest in the companies I admire the most.
Companies like Amazon, Facebook and Netflix are always trading at incredibly high valuations.
They have great business models, the generate crazy amounts of cash flow and the stock price typically never stops going up.
So, in January when I noticed Under Armour was trading for around $27/share – down from over $40 in 2016 – I decided to sell some puts.
Under Armour is one of these great companies.  At some point over the last few years, it has sponsored the best athlete in almost every major sport.  Revenue is over eight times what it was ten years ago.  Return on equity is consistently over 15%.
The puts I sold gave the buyer the right to sell 100 shares of Under Armour to me for $27.50 per share by February 21.  For that put option, I received $171.
This trade was right in my wheelhouse.  Under Armour is a great company with great management that I would want to own at $27.50 per share.  I was receiving close to $200 just to hold an option for six weeks.
Here’s where the trouble began.
At the end of January, Under Armour reported its financials.  Sales growth was “only” 18% because this is lower than Wall St. expected, Under Armour dropped from $25 to $19 in a day.
By the time the option came due, I was paying $2,750 for stock that was worth $1,969. Today, the position is worth about $1,800.
That’s a pretty big hit.  If you add the $170 to the position and $50 I received for selling covered calls at a $27.50 strike (where I would break even) it looks a little better.
Where it looks much better is the actual investment.  I will continue holding Under Armour indefinitely.  Like I said above, I don’t often get the opportunity to invest in great companies.
This one-day drop is the risk you take when selling options for premium.  For the most part, if you’re conservative, you can persist making good money (like I said a few weeks ago I manage an account that makes about $500 a month selling covered calls) by selling options.  Every once in a while, something crazy will happen.
The key is to expect the unexpected and have the intestinal fortitude to take the hits when they come.
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Best of March 2017

3/6/2017

When I started the site, my intention was to constantly write about the four pillars I will follow to become wealthy: personal finance, investing, entrepreneurship and economics.

I’ve written a little about entrepreneurship with stories about publishing my various books and spent time every week for the last few months thinking and writing about investing. Personal finance and economics have been forsaken.

I decided to rectify that this past week with a new budgeting series and more economics forsaking.

Over the next three days, I’ll post an article each day on budgeting. Starting today with, On the Philosophy of Budgeting.

On Wednesday, I’ll send another email with a fun special report version of the series that includes a secret fourth article only for subscribers.

A Week For Finallys

After almost six months of painting, massive cleaning, battling insurance companies, fretting about PMI fees and then weeks of being fruitless listed at the wrong price, my fiancee and I have finally rented out the condo.

For newer readers, our plan is to ladder up residences, moving every few years and never selling old houses.

As we move we’ll rent the last place and allow a tenant to pay off the mortgage.  Any profit from the rental will go into a down payment account focused brokerage that is only invested in fixed income.

For this specific property, the mortgage and HOA combined amount to around $700/mo and we were able to secure tenants at $900/mo.

In celebration, I have put my first book, on special situations investing, on a countdown deal.  Starting Tuesday, 3/7/2017, you will be able to get it for just $0.99.

I’ll sender a reminder of the deal on Wednesday along with the special report.

Massive Exposure

In my never ending attempt to drive traffic, I’ve started reposting some old articles on different sites.  These are the articles that my fiancee that gave my fiancee a pleasant surprise as she slugged through reading them.  You can find them at:

Quora

LinkedIn

Medium

3/13/2017

I wish I could start this email with a story about the massive amount of cleaning I did this weekend.

Unfortunately, the only cleaning that gone done was the normal weekend load of laundry and chipping off the hard water residue in the humidifier.

Still going to use the cliche to get this newsletter done.

Anyway, here are some items you should do to spring clean your finances:

  • Clear out high-interest debt.  If you have any debt with an interest rate over 6% or so you should put as many resources as possible toward paying it down.  This includes selling investments (as long as there is not a penalty to do so).  If you are paying 6% interest on a debt and have a bad year where you make less or lose money it’s double trouble.
  • Mine your Personal Capital.  I wrote about this recently.  Make a habit of going through all your transactions at least quarterly.
  • Create a housing plan.  If you are like me and want to create your own SFR (single family residence) empire, figure out how to save toward more down payments.  If you’re renting and want to purchase your first home, get your finances in line and get pre-approved for a mortgage.  If you’re going to stick with a house long-term, think about and decide how fast you want to pay it off or if you would benefit from a refinance.  If you’ve already paid off your house, figure out if you would benefit from using a HELOC to pull equity out for some other purpose.
  • Create secondary income sources.   Everyone has some skill or another than can be used to earn income online or otherwise.  You can freelance on Fiverr. Drive people around with Uber.  Rent out a spare room with Airbnb.  Walk dogs or babysit them.  Create an online course or write an eBook.  The potential is limited only by the effort you put into it.
  • Set-up a rainy day fund.  I couldn’t pass myself off as a finance expert without recommending this at some point.  It’s just cash you set aside in case you have no income for 3-6 months.

That’s it for now, if you have any other spring cleaning you do with your own finances, shoot me an email.

3/20/2017

I’ve been working on my next book between video games the past few weeks. For those who don’t know about it, the book is a collection of about 150 pages of investment writing I did between the ages of 14 and 19.

It will, of course, be called Confessions of a Teenage Investor.

Interspersed in the chapters are footnotes where I update the performance of various investments (spoiler alert: many of them went very badly), make fun of myself and fawn over the smart things I wrote from time to time.

One of the chapters I read through this weekend was notes from an investment conference I went to during my senior year of high school in 2007.  The conference was put on by a now defunct investment newsletter and was my first chance to meet many of the people I had been emailing.

I even made up business cards that just had my name and email on them.

The two best presentations were on options trading.  The strategies are two sides of the same coin: selling covered calls and selling naked puts.

Selling covered calls involves selling the right to purchase shares of a company you own for a set price within a set time frame.  Selling naked puts is selling the right to sell shares of a company for a set price within in a set time frame.

An advantage for both strategies is how seamlessly they fit into run of the mill value investing.

You can sell covered calls on a position you own that is nearing or over its intrinsic value to increase your returns.  You can sell naked puts on a company you do not own but would purchase at a good price.

Unfortunately, when I first learned about these strategies at that conference I had an immaterial income and was a minor so, according to the government, I was unprepared to trade options.

This led to years of financial heartache (I did not qualify to trade options until after I finished my graduate program about five years later) and many Facebook posts about the injustice of it all that I sometimes see in my Facebook memories.

Today I frequently use both strategies in my personal portfolio and others.

In an IRA I manage for a family member, I have used covered to calls to produce between $200-$500 in income in each of the last nine months.

In my down payment account, I have used naked put selling to produce an annualized return of around 15% on stocks I would be confident owning in even that low-risk account.

I have taken it to another level in my personal account where I use these two strategies but have also started work toward a more active option strategy.

I wrote about this strategy a few months ago.  Read about it here.

3/27/2017

My second book had the best open.  In its first week, it was downloaded over 400 times and led to a doubling of the newsletter subscriber count.

My first book, on special situations investing, has had about 50 downloads total.

The third book, which was released in January, and contained write-ups for various stocks, had just under 300.

The second book was a broader personal finance book.  It covers four steps you can take to retire a millionaire and then four ultra-advanced-mad-scientist-type steps to get even richer.  These include savings tips, how to earn more money and how to invest with proper asset allocation.

The first and third books are both solely investing books.  I believe this is why the second outperformed them.

So we have good and bad news.  The bad news is my new book (Confessions of a Teenage Investor), which I just finished the first draft of, is solely an investing book.  This implies a lower opening.

The good news is that, unlike the other investing books, Confessions has a target audience of beginners – after all, I was a beginner when I wrote it.

My plan is to market the book in this manner and try to rope in the types of people who read and enjoyed 4 Steps but were too intimidated by the other two.

Over the coming weeks, I will use this newsletter to update the progress of Confessions. Now that the first draft is done, all the other busy work that goes into the publishing is easy enough to explain and it would be good to get it on paper for future use.

In the meantime, the most successful book (4 Steps to Retiring a Millionaire) is free all this week.  Go see what the hoopla is about.


What’s the best way to save $1k per month?

Why not do both?

My fiancee and I use a brokerage account to save for our next down payment. We invest in various fixed income instruments that produce returns above 4% annually and don’t have the same risk profile of stocks.

We use that process to buy a new residence every two years and rent out the older houses.

Could stock analysis be summarized as running through a routine of indicators and disciplined research—a checklist if you will?

Many investors swear by checklists. I have one that I use for my traditional value plays. The problems arise with unique ideas.

If you’re looking at distressed debt, special situations, speculations, technical analysis, turn-arounds, start-ups, etc. (I could do this all day) there will be too many no answers in the checklist.

You could build specific checklists for each situation but in the end, it’s still going to come down to too many subjective decisions that don’t fit into a binary question in a checklist.

The best use of checklists in investing is to keep yourself honest.

Decide the bare minimum for each question, but keep an open mind in all situations. And make sure to have a behavioral finance section where you can grade your own biases.

How would you use Philip Fisher’s Scuttlebutt approach as an individual investor?

An interesting book came out about how to do this a few years ago: The Sleuth Investor: Uncover the Best Stocks Before They make Their Move

The author is, somewhat surprisingly, a traditional value investor. In the book, he talks about how to talk to customers, suppliers, employees, etc. All the good Fisher stuff.

The fun part is where he also talks about how to chat up executive admins to learn about divorces or other personal gossip that could potentially move stock prices.

What is the best way to start investing when you are in college?

The first thing you need to do is figure out what your risk tolerance is. This will determine where you should invest.

If you have a low-risk tolerance and are looking to invest just to make more money than you can make in a Bank account there are fixed income investments you can learn about to do that.

If you don’t want to take a lot of risks but also don’t want to just own bonds you can think about using proper asset allocation where you diversify among domestic and foreign asset classes. This way if one crashes there will be uncorrelated assets that don’t.

If you want to learn about and invest in specific stocks, you should make a list of the companies you like the most and start to learn accounting and valuation to pick out the ones who are undervalued.

All of these methods can be done with a simple discount brokerage account, like TD Ameritrade.

Why aren’t there more mid-range shots in NBA games? What can we do to allow for more of them?

Three points are more than two.

If, as a team, you’re hitting 40% of your threes the expected value of a 3 point shot is 1.2 points. You’d need to hit 60% of your mid-range shots to get the same expected value.

There are some players, notably DeMar DeRozan, LaMarcus Aldridge and Gordon Heyward, who specialize in the mid-range shot. Because NBA defenses have adapted to defending the three so aggressively these players have had a lot of success getting open in the mid-range.

As for how we could allow for more, the real question is why would we do that? 3-point shots are more fun and give lesser teams a better shot against Goliath.

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Mining Your Personal Capital

I was a Mint early adopter.  As soon as I found out there was a way to look at every single one of your financial accounts in one place, track expenses and help calculate your net worth I was all in.

Don’t worry about the fact that at the time I was a college student with a <$10k net worth.

Today, I have moved on to Personal Capital which does a little bit better job at showing your up-to-date Net Worth.

You can add all your bank accounts, brokerage accounts, and debts.  For real estate, it pulls the up to date Zestimate and for cars it pulls the Blue Book value.  There are custom fields you can create as well – which I did for a weird 401k plan at an old job that doesn’t report well on these sites.

The key part of the site for this article is the spending breakdown.

Twenty or thirty years ago most people knew about each one of their expenses – because every expense was written down in a check register.

There are still people who do this in between Bingo games, but for everyone else, I’d recommend Personal Capital or Mint.com.  You can quickly move from scanning all the expenses in your checking account to all those on each credit cards you use.

It’s a good way to both identify any potential identity theft and to find any recurring charges you forgot about or that have increased.

I love setting up recurring payments.  I use recurring payments on two mortgages, two HOA payments, electricity, gas, cable, Netflix, Amazon prime, several investing newsletters, Audible, a couple sports magazines, etc.

I had to use et cetera at the end of the sentence because my monthly and annual recurring charges are too vast to keep track of on the top of my head.

I once realized that I had forgotten that I had a Hulu account for two years – that’s $192 of expenses that could’ve been avoided with a cursory look at my monthly expenses.

I’ve also used this rundown to find that my electricity or gas payment was jumping higher and then remind myself to be mindful when lights need to be on or what the temperature in the house needs to be.

More recently, my scan prompted me to check out the composition of one of my monthly mortgage payments.

Turns out I was paying $44 per month for PMI.  PMI is mortgage insurance that must be paid by the borrower as long as the LTV of the house is above 80%.

On the face of it that made sense – I purchased the house with 5% down about three years ago.  However, per Zillow, the house now has a 75% LYV.

While I acknowledge that the Zillow value might not be accurate, I have talked to the bank about doing a desktop appraisal to update the value of the house.  That scan may have saved me $528 per year.

Go set up your Personal Capital or Mint today and take a quick glance at the past three or four months of expenses.  You can even use the tools on the site to categorize each expense and see what you’re spending on food or gas or movies or squirrel traps each month.  If you find something crazy you didn’t realize you were spending on each month drop me a line at Mike@rightpriceinvesting.com and I’ll include it in a future newsletter (anonymously of course).

If you’re not comfortable with putting all these logins in one place, do what my fiancee does: every month login to each account directly and hand write out all the expenses.  This will force you to think about every expense – trying wasting money on something when you know you have to face yourself at the end of the month.

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Hacking Your Average Meal Cost

It’s strange to think about food as a variable cost.  The need for food is certainly not variable.  Outside of goods like gas (don’t need a strategy for that one, just get a Costco membership), the amount you spend on food is likely the cost you can manipulate to the better the most.

Sure, you can move to a town with cheaper rent, start taking the train to work or buy energy efficient appliances, but these are all one-time moves that are either unsustainable or require high upfront costs.  Focusing on ways to reduce your average meal costs is likely the most sustainable way to materially reduce your outgoing expenses.

Bringing the discussion back to diets (the two topics are similar – it’s all about what’s going in and what’s coming out), the most successful diet I have used is Tim Ferris’s Slow Carb diet .  In this diet, you avoid carbs, eat the same meals over and over, try to eat beans every day and binge on whatever you want once per week.

It works well because it manages to combine the best way to burn fat (dropping carbs) with sustainability (the binge day).  Most low-carb diets are not sustainable.

The factor we want to look at, however, is eating the same meals over and over.

When I was most successful with this diet (about 40 lbs. ago, unfortunately), I was eating the same eggs and bacon for breakfast and hotdogs with refried beans for lunch every day.  Dinner was usually some meat or another I had George Foremaned with microwaved vegetables.  I was in college at the time so that meal plan didn’t seem at all strange to me.

This time probably also represented the least money paid per meal.  Eggs, hot dogs, frozen vegetables and cans of beans are all incredibly inexpensive.

When I graduated from college and got a grown-up job, I found it was a lot easier to just drive over to Chick fil A for lunch or get some new expensive thing for dinner each night.  My costs per meal skyrocketed.

I used Mint at the time to track my expenses by category each month and was often embarrassed by the amount I was spending on food.  Around that time, I adopted a cat and decided to spend my lunch hour hanging out with him at home.  I didn’t have enough time to stop at a fast food place so I needed to start purchasing enough food to make for lunch every day.

Soon enough, that became a problem too.  I was working hard at the day job and it was annoying to come home and spend the entire time cooking.  So, I started preparing all my meals ahead of time.  My fiancée and I still use this method to this day (we have two cats and a dog now to visit at lunch) and she writes-up a fun whiteboard each week with our food options.

What we prepare depends on what we’re feeling that week.  Sometimes it’s pork belly and frozen peas.  Sometimes we load up the slow cooker with a random meat and a ton of other vegetables.  Sometimes we just buy several different kinds of lunch meat and cheese and roll them up with mayo.

A typical Costco receipt for us will be two different kinds of meat or fish, a pack of water bottles and some other no calories drink, apples or avocados, eggs and maybe some soup.  That’s it.  If we decide to eat breakfast that week, we’ll get microwavable quiches or bacon.

We’ll visit various grocery stores when needed for non-bulk purchases (like vegetables or spices).

Spread over a week and a half or so the per meal food cost drops down to incredibly sustainable levels and allows us to save more and more each month toward our next down payment.

Nice.

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On the Philosophy of Budgeting

Outside of the saving section of my second book , I haven’t written much about budgeting on the site or in the newsletter.  To be honest, I don’t think about it all that much.  I don’t do any of the traditional budgeting – sitting down once a month and tracking all my expenses down to the cent and planning exactly what I will spend the next month.  I don’t even know generally how much I spend in most areas.

To me, budgeting is like dieting – you’re better off focusing on broad strokes (like avoiding sugar or not eating out very often) than you are trying to track each calorie or each dollar.

Over the next few articles, I will go over my key strategies for increasing the amount I save each month.  Each is incredibly doable by readers in just about any income situation.

To start, let’s go over the single strategy that has impacted me the most: only spending cash.

Throughout college and the first few years of my grown-up life, I used credit cards to pay for just about everything.  I didn’t use to them to spend cash I didn’t have, thankfully, the balances were paid off religiously each month.  It was a convenience thing and a get more reward points thing.

I still recommend using credit cards for many things.  I personally use them for anything I buy online (obviously), all my gas and good purchases and any other big non-recurring purchase.

Here’s the issue: when you spend with credit cards you don’t see the money leaving and you don’t have a logical limit.

When you spend cash, it hurts to see dollars get exchanged for perishable goods and, of course, there’s only so much cash you can rationally carry at any time.

My fiancée and I both take out $40 each week.  This is all the money we can spend on miscellaneous items for that week.  Things like afternoon snacks, eating out for lunch, getting McDonalds iced coffee in the morning or buying yet another pet.

If we have cash left over at the end of the week, it just means we get to have a more fun brunch on Saturday.  If we hit the limit on Wednesday, no more fun that week.

This constraint not only creates an actual ceiling on our spending, it also forces us to think through each purchase.  I have often walked over to a gas station during work and decided not to buy a $3.79 stick of beef jerky that day because it would mean I was running out of cash too fast.  I have also had a totally guilt free Cheesecake Factory lunch that cost over $25 because I had the cash left over.

In the past, I would’ve felt stupid about wasting money on the beef jerky but done it anyway and then I probably would’ve skipped the Cheesecake Factory because I thought it was just too expensive.

Where you start with cash depends on your own preferences.  I actually started with taking out $60 each week and found out I could cut it to $40.  A friend who read about this strategy in my second book started with $100 a week (and visited the ATM on Tuesday) because her priorities were different.

The key is not to guilt trip yourself away from buying things you like.  It’s to make sure you understand the actual cost of those things.

If you have a substantial income (see the last article for ways to increase this) and substantial tastes than taking out $100 like my friend did or take out $500.  Don’t let budgeting control you – use it as a tool to figure out superior strategies for living your life.

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Best of February 2017

How to get me to work for you – 2/6/2017

Last night the Pats completed the biggest (by far) comeback in super bowl history to defeat the Falcons 34-28 in overtime.

Noted Pats fan Mark Wahlberg famously left the stadium in a huff following a poor showing in the first half, and I have to admit, even I wavered on watching much of the second half in lieu of playing video games.

Though I’m sure you’ll read and hear a thousand explanations for the Falcons rise and subsequent collapse this week, it is worth noting that the Patriots eventual surge to greatness came as it nearly doubled the Falcons offensive plays and came despite numerous mistakes in the first half.

Saving for retirement is similar.

How about that for a transition?

For many people, 401K plans are approached with derision.  Yes, they often come with matches from employers and yes, they are a great way to entertain the concept I call forced savings.

But, even I have written about their pitfalls and most people are content to blindly pick a few funds and let it sit.

This is similar to the Falcons.  They get out to a great start with the employer match and maybe even make a good return.

Over time, however, fees erode the match and the lack of options pigeonholes them into poor performing funds.

Over the past few years, I have analyzed many 401K plans (at least 13) for friends and family and recommended which fund or funds for them to invest in.  The process is fairly simple, I look for the cheapest funds based on fees, try to get good past performance and then figure out a proper asset allocation to reduce risk.

I’ve written about how to invest your 401K before as well.

This approach can be enough.  But for people who don’t care to take the time to analyze each fund, they are offered or to figure out how to weigh different asset classes I have a solution.

I have created a new Fiverr gig to apply the methods I have developed to analyze 401K offerings.  For $5 I will analyze up to five fund options.  Each additional five also costs $5.  And for $10 I will create a sample asset allocation.

Easy Enough.

You can find the gig here.

 

IPOing and Income Growing – 2/13/2017

Last week Snap (the parent company of Snapchat) filed to go public in March.

As per usual with technology stocks, Snap will likely be tremendously overvalued when it begins trading.  The company has been rumored to be seeking a $25B valuation at its IPO – over 60x its sales of $400mm.

Facebook IPOed at about 13x sales and Twitter IPOed at about 4x sales for comparison.

Facebook and Twitter IPOed long ago by tech industry standards, so how does the Snap valuation compare to the current Facebook and Twitter valuations?  Facebook currently trades for $209/user, Twitter trades for $34/user and Snap’s IPO will price it at $158/user.

Facebook has revolutionized the online advertising industry and is one of the better managed companies in the country.  Snapchat is much closer to Twitter as far as where it sits in its corporate lifecycle.

In addition to the valuation madness, the company will debut with a complicated share structure that gives its CEO total control over all aspects of the company with little to no checks and balances.

This structure can work well with a visionary CEO, but there is not enough evidence to date that Evan Spiegel is that to justify pricing the stock this high with this structure.

So where are investors to turn?

Traditionally, investors seeking safe haven in stocks turn to dividends.  The dividend produces a floor for a potential drop in the stock prices and companies focusing on paying and growing a dividend are usually mature and not focused on risky growth initiatives.

Unfortunately, the mass investment in dividend and low volatility stocks with passive investing strategies has driven their prices up to unsustainable levels.

Luckily, I have swooped in with a new article on alternatives to dividend stocks.

Let me know what you think.

 

Building Your Way to $60 Billion – 2/21/2017

My fiancee and I recently watched the new HBO documentary on Warren Buffett.

Nothing like a documentary on an investor to make your weekend exciting.

Buffett was surprisingly open with the documentary (considering he once blackballed a biographer for revealing too much) and the documentary did well to illuminate some of the inner workings of Buffett’s day-to-day.

Much of the documentary focuses on the dramatic aspects of Buffett’s life: like nominally having two wives in two states at one time, being best friends with Bill Gates and the hit to Berkshire’s reputation when Solomon Brothers went haywire in the early 90’s.

Thankfully, there is also a tangible investigation into Buffett’s success.  Starting out with his special situation based ‘Cigar Butt’ investing with his original partnership, moving into control investments and finally into focusing on quality.

Insurance float (utilizing insurance premiums as investment dry powder) and compound interest also had their say.

It is interesting to note the impact compound interest had on Buffet’s net worth and his (relatively) slow start.

Buffett’s net worth today is somewhere around $60B.  Where would you guess it was when he was 30? (~55 years ago)

It must be at least a $1B, right?  Multiplying your net worth by 60x is hard even over 55 years.

It was, surprisingly, just $1 million.

In fact, Buffett didn’t reach $1 billion until his mid-50’s.

This is the impact of compound interest.  As Buffet grew, acquiring cash generators and float generators, each additional investment provided the fuel for the next.

I’ve kept that in mind over the past month or so.  The newsletter today has just over 30 subscribers.  Daily page views on the website range between 10-15.

I’m sure you’ve noticed that the depth and tone of the newsletter have changed – hopefully for the better.

I have also focused on bringing my thoughts to more readers through Quora over the past month.

I put together the best of January post today and it contains my better Quora answers and newsletter highlights.

Hopefully, some compound interest (and a liberal dose of inflation) will get us to $1 million by 30.  At least to $1 billion by 55.

Wantrepreneurs – 2/27/2017

Just under three years ago, around when my first book was published, a coworker shared an article with me about a high school student who had created a programming course on Udemy that became so popular he was making thousands of dollars each month with it.

We often shared similar articles and she knew all about my book and the website I built for it.

Over the next few months, I wrote a newsletter every once in a while, watched my non-existing book sales with distress and mostly daydreamed about what my website could be.  Every once in a while she would ask for an update on the site or when my course would be coming out and I would sheepishly come up with one excuse or another.

I need to get more newsletter subscribers first.

My cat’s been sick.

I’m working on the outline.

I need to get my next book published first.

The Packers lost.

Regardless of what the excuse of the day was the end result was the same: no material progress being made.

Eventually, I finished writing the second book and soon after changed jobs.

The new job was another great excuse to not work and I took advantage of it with gusto.

This phenomenon has been billed wantrepreneurship.

There are thousands of people milling about in their average jobs daydreaming about the online business they could start one day.  They just need to get that one break to make it happen.

They listen to James Altucher podcasts, read cheap or free online marketing eBooks, subscribe to Youtube channels about Kindle book keywords and never DO anything.

Sure, there’s reasons for the endless procrastination.  Keeping a website constantly updated is hard and no one is going to do the work for you.  Driving traffic is almost impossible when you’re beginning and each day of 6 views, all from family members, rots away motivation just a little more.

I’ve seen this phenomenon in other areas of life too.

I can’t count how many times I’ve spent hours talking about how muni bonds or some option strategy works with someone – only to get them to the point of starting a brokerage account and then fail.

Change is hard and uncertainty can be terrifying.

The good news is it really does just take on break.  For me, it was the second book.

Since that book came out, I haven’t missed a weekly newsletter I planned to send out.  I’ve experimented with different newsletters formats, written a second book, developed and kept multiple portfolios updated and most importantly, more than doubled the number of subscribers to this newsletter.

I’ve even started work on my first course – stay tuned over the coming weeks for more info about it.

Coincidentally enough, the catalyst for that second book was a Udemy course on publishing Kindle eBooks.

Until the afternoon of March 1, Udemy has a sitewide $10 per course sale.

You can learn about publishing eBooks like I did.  Learn about building your personal brand from today’s foremost internet marketing expert.  Or even learn to invest from six Hedge Fund gurus who MBA students pay thousands to learn from.

Breakthrough your procrastination today.

What are the best ways to invest $100 million as of early 2017?

Invest in real estate, hotels, casinos, and golf courses.

Write a book about how good you are at it.

Get on a TV show about being a good businessman.

Have extreme political opinions that appeal to a lot of people and constantly express them on twitter.

Run for president.

How do I save 500 dollars?

Here are a few quick things you can do:

  • Create “forced savings” where the money is transferred out of your account or out of your paycheck into a savings account before you can even see it. This way you won’t have the emotional attachment to it or want to spend it right away.
  • Use Digit to save money each month without even having to set up a transfer. They use an algorithm to figure out when you won’t need the cash and automatically transfer it to savings.
  • Figure out what your big variable expenses are (things like movies, eating out, golf, etc.) and manage them by only spending cash on them and only allowing yourself a set amount of cash per week – I use $40 in cash per week and if I hit that amount I can’t spend more.
  • Create an account with Personal Capital or Mint and go through 6–12 months of you checking account and credit card transactions to see if you have any recurring payments you can get rid of.

If you like these fun strategies like this I wrote a book with more ideas: Amazon.com: Four Steps to Retiring a Millionaire

When would a company intentionally reduce its market share?

A company I worked with spent about 20 years of its existence making run of the mill widgets and then China got into the market.

Within five years, half of its domestic competitors had gone bankrupt and its revenue had been cut by 80%.

It diversified into more specialty widgets and rebuilds – basically areas where mass production wasn’t a factor and shipping cost was.

The company’s market share in the original product actually went up when China originally entered the market as it outlasted its competitors and many customers wanted a “Made in America” product. However, it eventually determined the best course of its business was to pivot, purposely drop its market share in one area and beef up another product line.

What are the best online value investing courses based on Ben Graham’s philosophy?

John Mihaljevic has a good course on Udemy: John Mihaljevic | Editor of The Manual of Ideas| Udemy and good Youtube channel: The Manual of Ideas

Breaking Into Wall St is more about getting an i banking job but it has a bunch of good financial modeling stuff.

The Khan Academy has a load of finance and capital market videos.

Finally, the most renowned value expert is likely Aswath Damodaran at NYU, all his courses are online.

If AI dominated the field of value investing by parsing and analyzing, like human, would there be any point in producing contents for value investors?

I can sort of relate to this with a checklist I put together for value investing.

The checklist is great to a point for traditional fundamental analysis on growing companies with good brands.

It fails when I try to apply it to any investment with hair – because they, by definition, will fail many checklist items.

You could work around this by programming the AI to have a checklist for any conceivable situation, but the end point is uncertainty.

Where value investors outperform is when they are more certain than the market.

Over time the AI would price out the traditional value plays – the stocks that are in all of the passive ETFs right now.

There would still be investments with a ton of uncertainty where humans could move in and use their subjective judgment to make money where the AI didn’t see value.

 

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Best of January 2017

Right Price Investing, where the newsletter changes more often than a Jill Stein supporter gets measles
Approchable
I spent the last few weeks sending questions to a few subscribers about the newsletter and came away with a similar answer each time: It needs to be more approachable.  If you get a 3-page long stock treatise with several words only used by CPAs, you’ll stop reading the newsletter each week.
So, in my never-ending quest to test new formats, I am going to try to make the newsletter shorter and more approachable each week.  I’ll offer several small, fun things and keep the longer stuff on the website for those who want it.
I will, however, continue sending one longer email a month with the portfolio reviews, so you’ve got that going for you, which is nice.
The Tyranny of “I feel like”
Earlier this year I had to stop listening to one of my favorite football podcasts.  The podcast had great and interesting content each week, there was a ton of Packers info and the guys in it all had great backgrounds.  I just could not get over the host couching every statement he made with the phrase, “I feel like,” and now that I have this newsletter and these smaller sections to rant about it with that fun title I will.
When you use “I feel like” or “I think” or “In my mind,” you are stealing all of the power out of your statement and giving the person you’re talking to the opportunity to doubt.
If you say “I feel like Aaron Rodgers is the best quarterback of his generation,” you’re just dropping one more medium temperature hot take no one gives a sh*t about.
If you say “Aaron Rodgers’ insane arm talent and td:int ratio make him the best quarterback of his generation,” you immediately sound like more of an expert and the persuasive power of your statement increases exponentially.
Adult up and be assertive when speaking and you will be taken more seriously.
Fiverr Gigs

In the spirit of income generation, I created a couple of Fiverr gigs a while back and when no one ever purchased either, I gave up on them ever being used.

Now that I’m juicing up the website and my subscriber count is increasing about 10% weekly (note, 10% of 20 is 2), I’ve decided to get back on the Fiverr bandwagon and try to make some of that nice freelance cash.

Read more on how you can get me to work for you here.  

2017 Goals
I have always turned my nose up at New Year’s resolutions.  It’s the extreme anti-cliche contrarian in me that won’t stay in the background.  Despite this, I still want to set some goals for 2017.  All of these will be related to the website, so feel free to hold me to them when you see me in public or offer help if you have experience or expertise:
  • Publish at least 3 new eBooks
  • Create and publish my first course
  • Create a podcast
  • Publish audio versions of all my books
  • Hit 1,000 subscribers on this list
These definitely are not easy jobs to do – but they all need to be done if this is going to be a serious business.
Investing in Asia​​​​​​​
I am constantly searching for feasible ways to add more geographical diversification to the portfolios I manage.  Typically, I will add a foreign market debt ETF or buy the ETFs of some countries with low valuations.
Those are both sort of half-measures, so I was delighted to learn that Kim Iskyan, a former hedge fund manager and world traveler, was starting a new newsletter focused on investing in Asia.
I was lucky enough to read through some of his material, talk with him on the phone last week and add this newsletter as an affiliate product for the website.  I look forward to reading it each month and recommending it.
To learn more about his method, read their affiliate post on the site here and if you want to go straight to the pitch for the newsletter, simply click on the subhead above (it’s only $59/year!).

Until Friday
A few times a week, I drive home for lunch to take the dog out and listen to a podcast. Midway through December, I found myself ignoring the podcast to instead think over a bunch of stock ideas and strategies that had been floating around in my mind.
On the way to work one of those days, I mentioned in passing to my fiancée/editor that it would be fun to write an eBook with all these strategies and write-up the stocks.  I could use my checklist to write-up some of the stocks (to encourage readers to sign-up to my list to access the checklist) and put my Fiverr tear-sheet in front of some of the chapters as well.
“Well, do it then,” she responded.
Over the next two-and-a-half weeks or so, I neglected animal time after work, spent the weekends putting together stock charts and spreadsheets, contacted a couple different graphic designers to work on the cover and kept in mind all the grammatical issues I tend to make in everything I write.
Soon enough, I had plowed through 65 pages and the book was ready for her to edit.  The final product has ten trades: two ETFs and nine stocks (one trade buys one stock and shorts another).  The strategies/themes/whatever buzzword you want to use are:
  • Boring Fixed Income
  • Trump Trades
  • Market Overreactions
  • Buying Back into Active Investing
  • Gold and Silver Bets that Are Not Just Gold and Silver Bets
All-in-all this is my favorite book I’ve ever written.  As I have with my newsletter, I targeted approachability and humor in the writing and tried to use as many different tools to analyze the stocks as I could to get beginner level exposure to all of them.
Hopefully, you’ll love the book as much as I do.  It is free right now and will be until this Friday – I’ll send another email out then as a reminder.

Portfolio Review Week! Mount up!

By the end of 2016, uranium was down about 90% since 2010.

Ignorance of the science behind nuclear energy, the Fukushima disaster and assorted other nonsense had pushed the price far below levels where it could realistically be produced.

For a few years, commodity investing expert Rick Rule had pounded the drum to speculators to invest in Uranium. His thesis that the basic laws of economics would not allow the price of a valuable commodity (nuclear energy still creates tons of demand for uranium around the world) to stay below the cost of production was logically sound but was taking a while to work out.

We added uranium producer Cameco to the Market Timing Portfolio when it debuted in November 2016.

On December 21, our favorite Quant, Meb Faber, wrote about uranium comparing it to coal stocks at the end of 2015.  Coal stocks en masse doubled in 2016.

The timing couldn’t have been better, Cameco is up 24% since Faber’s post and up more than 40% since it was added to the market timing portfolio.

The market timing portfolio as a whole has massacred the market, and good thing too, because the other portfolios have seen performances ranging from satisfactory to FUBAR.

In addition to Cameco’s massive return, our trades in the Russian, Polish and Brazilian ETFs are all up more than 15%.

Nice.

For more on the portfolios (including the performance of the Stocks for 2017 portfolio’s first month and some lessons I learned from losing 70+% in option trading),you can find this month’s review here.

Quora Answers

How to invest $50,000 for 3-5 years

Make a watch list of quality companies you are familiar with and interact with in your daily life.

Either learn how to value them or use a service like Morningstar to value them.

Sell put options on the companies at a strike price below that value. When you sell the puts you are paid a premium up front to give the other party the right, but not the obligation, to sell the stock to you at the strike price.

For example, if you sell a put with a strike price of $115 and an expiration date a month out on Apple for $2, you receive $200 up front (option contracts have to be 100 shares). If the stock price falls below $113 (the strike price minus the premium) the other party is likely to put the stock to you, which means you would have to pay $11,500 ($115*100) for the stock.

This is a lot of money (you would probably want to focus on stocks with lower prices for a $50k portfolio), but remember that you believe the stock is worth more.

When you are put stocks, hold them until they trade for 20% more than the value you calculated.

Once they approach that number, sell call options.

When selling call options you are also paid a premium up front to give the other party the right, but not the obligation, to buy the stock from you at the strike price.

In both of these cases you will find quality companies and pick a price range where you want to own them. You can then sell other people the option to buy or sell them outside of your price range to trade around the position.

As you do this over and over you will get a handle on option pricing and be able to target when the volatility portion of the option price is too high or too low. You can also start identifying other ways to trade with options. If you’re interest I wrote about my option trading strategy here: Toward an Active Trading Strategy

When should you buy a stock?

I’ve been a value investor for about 13 years and in that time have never figured out quite how to perfectly time my buys. No one has really.

There are technical indicators, and I have written about trying them out before, that seem to allow you to better gauge the market’s emotions.

Many value investors think reading charts is hogwash but trust their own ability to judge management from thousands of miles away or predict cash flows 15 years from now.

I think of these things there is a better chance that buying when a stock is trending up (or even when a down trending or channeling stock is starting to move toward a better trend using Bollinger band width and MACD to figure this out) so that you know the emotion of the market is positive will have consistently good results.

What is your investment checklist before you buy a stock? 

I have a detailed seven-page checklist I go through for all traditional value investments (think Peter Lynch/Warren Buffett style stuff) I make. It works pretty well for these straightforward deals and I’m thinking of adding some technical analysis to it as well.

The problems I’ve had with the checklist are that I have a hard time applying it to industries that have unusual characteristics, commodities, turnaround situations, ETFs and CEFs, high growth companies, short-term trades, you get the picture.

When it comes down to it, the checklist applies to the minority of potential investments/speculations that I look at. I put all this time into synthesizing my thoughts and reading all these books and I don’t really use it that much. Oh well.

Should I start a McDonald’s franchise if I had $1mm?

Do what McDonald’s would do.

Identify some good commercial real estate and buy it with 25% down or as little as you can put down so you can spread the cash over several properties.

Find people who want to start reliable franchises in the locations and lease the CRE to them.

This way they are paying the debt down for you.

Set aside part of the payment for maintenance issues and make sure to use the depreciation and interest to reduce your taxes.

Over time collect the excess payments and invest them in municipal bonds yielding 4%+ tax free, when you have enough for another down payment buy another property.

What is the Value Investing approach for bonds?

Meb Faber recently wrote about this in one of his classic white papers that turns into a fun ETF: http://mebfaber.com/wp-content/u…

Basically, when you’re looking for value you look for the highest yields. This is similar in other forms of value investing – in stocks you look for the highest earnings yield and with real estate you look for the highest capitalization rate.

As for how to fundamentally analyze bonds, which is what value investors do, you should first analyze the balance sheet.

Look for ratios of debt to cash and other assets that can be turned into cash. In the footnotes for the financials you can find the maturity dates of the various debt instruments the company has used. Make sure that there isn’t a clump of them due prior to your bond maturing.

Next, analyze the income. As a credit underwriter in my day job, our main focus is cash available for debt service. Compare this number with the annual required interest and debt payments and make sure you have a sufficient margin of safety if the income happens to fall.

Finally, it is important to keep in mind that bonds almost always have a binary outcome – they will default or you will get paid back. In some circumstances there can be restructuring as well, but for our analysis that can be considered the same as a default.

If you get paid back 100% on the maturity date all volatility in the interim is irrelevant.

How do I convince my parents to let me open an investment account? 

I opened my first brokerage account when I was 13 with $1,000 and immediately put half in Krispy Kreme and half in Pfizer. Both were terrible decisions that lost 30+%.

As I got different summer and after school jobs I would transfer more money into the account and diversified more and created better returns.

My parents were also wary at first. I was able to convince them that it was a smart decision by earning the money on my own through these various jobs and writing up every investment I made to prove I was thinking them through well.

I started a blog when I was around 15 to track my investments and write about what I was learning. If you can’t convince your parents right away this would be a good idea. You can point toward the good picks you have made and show them what you have learned and even get feedback from professional investors. I often used my age as a way to get a foot into the door to discussions with hedge fund managers who otherwise would have ignored me.

Worst case you can invest the money when you turn 18 either way.

Another strategy could be to agree to save half of what you contribute to the brokerage account in a traditional savings account/CD/municipal bond that is super low risk.

If you are committed to earning money and saving it from a young age you can demonstrate discipline that is unusual for someone your age and that can also be an argument for investing.

Good luck!

Don’t wait until the end of the month! Get this info in real time with my weekly newsletter below: 

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IPOing and Income Growing

Last week Snap (the parent company of Snapchat) filed to go public in March.
As per usual with technology stocks, Snap will likely be tremendously overvalued when it begins trading.  The company has been rumored to be seeking a $25B valuation at its IPO – over 60x its sales of $400mm.
Facebook IPOed at about 13x sales and Twitter IPOed at about 4x sales.
Facebook and Twitter IPOed long ago by tech industry standards, so how does the Snap valuation compare to the current Facebook and Twitter valuations?  Facebook currently trades for $209/user, Twitter trades for $34/user and Snap’s IPO will price it at $158/user.
Facebook has revolutionized the online advertising industry and is one of the better managed companies in the country.  Snapchat is much closer to Twitter as far as where it sits in its corporate life-cycle.
In addition to the valuation madness, the company will debut with a complicated share structure that gives its CEO total control over all aspects of the company with little to no checks and balances.
This structure can work well with a visionary CEO, but there is not enough evidence to date that Evan Spiegel is that to justify pricing the stock this high with this structure.
So where are investors to turn?
Traditionally, investors seeking safe haven in stocks turn to dividends.  The dividend produces a floor for a potential drop in the stock prices and companies focusing on paying and growing a dividend are usually mature and not focused on risky growth initiatives.
Unfortunately, the mass investment in dividend and low volatility stocks with passive investing strategies has driven their prices up to unsustainable levels.
Luckily, I have swooped in with a new article on alternatives to dividend stocks.
Let me know what you think.

 

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Alternatives to Dividend Stocks

Dividend stocks are traditionally the go-to conservative stock investment.  Anyone who can’t sleep at night because they are too worried about their Fitbit investment or latest coal speculation can turn to a stodgy old slow-grower with a 4% dividend and sleep peacefully until the cat starts clawing through the door to be fed at 4 am (note: this may not happen to everyone).

There are all kinds of studies on the efficacy of dividend stocks and their low volatility.  So many in fact that trillions of dollars have poured into ETFs focusing just on dividend stocks, driving up the valuations of the classics to unappealing levels.

There are so many hoops to jump through to make dividend investing worth it, you may as well give up.  Meb Faber summarizes it well here.

There is still a need for low volatility, income producing investments, however.  Thankfully, for all of society, I have a few suggestions before the entire financial system comes crumbling down.

Use Fixed-Income

Let’s start with the easiest one – easiest for me at least, since I’ve written about this a ton before.  Well, at least twice, once in an article and once in a book .

Shareholder Yield

Another easy one.  This time we’ll return to the Meb Faber well.

Faber has an eBook on the subject, a domestic ETF (SYLD) and a Foreign ETF (FYLD).

Shareholder yield is the sum of: dividends paid, stock repurchased and debt repaid over the market cap.

The theory is that dividends are not the only way to return value to shareholders.  When you pay a dividend, you are sending the company’s assets to shareholders.  When you buy back stock or pay down debt, you’re increasing the shareholder’s claims on those same assets – without having to pay a tax on it.

Faber’s funds both sort their investment universes and purchase the top 100 stocks by shareholder yield.

Get an Investment Property

My fiancée and I have our first condo on the market right now.  If all goes well, it would add a substantial income each month.

Right now, the condo is listed for $1,200/mo and has been for about, I will soon be dropping that to $1,100.  Let’s assume it eventually rents for $1,100.

The mortgage each month is $515.  Part of that mortgage payment goes to pay off the principal balance (about $88k) and part goes to interest we will be able to write-off. The HOA is $150.

Of that $1,100, about $435 comes straight to us cleanly and about $300 or so comes will come back when we get a tax refund.  If we wanted, we could pay between $100 and $200 to a property management firm to manage the place for us.

Not bad for a condo I purchased as a bachelor with $5k down and lived in for two years.

Buy Some Mortgages

An investment start-up called PeerStreet is giving investors unprecedented access into the market for investing in mortgages.

The company partners with lenders to offer mortgages in which customers can invest.  The loans typically produce returns between 6-12% annually, have 6-24 month terms and have loan-to-value under 75%.

The company also produces all necessary information to underwrite the deals: credit scores, appraisals, etc.

Create an Online Investment Property

Online investment property is the fun term I like to use for niche sites.

Niches sites are education web sites built for a single purpose that either drive visitors to an affiliate product, a product created by the website creator or simply host ads.

Niche sites are typically built of search terms that are popular but not too popular, one podcasters I like often talks about how his aging mother created a second income with a game room website.

Typically, the site is full of good free content (it must be for good search engine optimization).  This could either be done by you or by writers hired on Fiverr or Upwork.

Ads can be from Google’s Adsense and for affiliate products seek out relevant industry products and just look through their sites for an affiliate program.

For more on this strategy from people who have done it well visit the Niche Site Duel.

Use Options

Here’s the one I prefer the most.  It’s simple and you can even use the same type of low volatility classic value stocks.

First, find the stock you want to use.  One I often use is Fiat.  Fiat has a low enough stock price ($10.75) that it would buying 100 shares would be doable for most investors and is worth substantially more than that price per the Morningstar value.

Our trade has a few layers, we start with selling naked puts.

Let’s look at some of the puts available a month out:

We like to look for options with a strike below the current price, so in this instance we would target the $10 strike.  The current price is $0.27.

Assuming the trade went through at $0.27, we would be selling the right for the buyer to put (sell) 100 shares of the stock to us at any time between now and 3/17/17 for $10 per share.  For that privilege, the buyer pays us $27.

To break-even on a sell the stock would have to fall from the current $10.75 to $9.73 which is a 9.5% drop in just over a month.  If it does not do that, we pocket the $27.  If you have a margin account, you would have to hold 20% of the underlying stock value ($1,000) plus the option value ($27) which is $205, the $27 is a 13% return on that margin requirement.  If you don’t have a margin account you would have to hold the $1,000 in cash and would earn 2.7%, which is >35% annually.

It is worth noting, the option price is often outdated, if you look at the bid/ask you would more likely be able to sell the option for around $0.17 or $0.18, this would be an 8% or 1.7% return.

The risk is the potential for Fiat to hit a speed bump and drop to $8 or $7 per share.  At that point you’d be opening a positon with a 20 or 30% loss.  AT that point you’d need a 25% or 43%, respectively, gain to break even.

Let’s say the stock did fall to $9 per share and was put to you.  You now own $900 of stock with a cost basis of $973 (including the $1,000 for the stock and the $27 option premium).  You can either hold the stock long-term, or start trading around the position with covered calls.

If you want to just exit the position where you started, target the $10 strikes.  Right now, similarly priced calls trade for about $0.15.  For offering to sell at $10 for a month you would make 1.7% – 22% annually.

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Portfolio Review January 2017

By the end of 2016, uranium was down about 90% since 2010.

Ignorance of the science behind nuclear energy, the Fukushima disaster and assorted other nonsense had pushed the price far below levels where it could realistically be produced.

For a few years, commodity investing expert Rick Rule pounded the drum to speculators to invest in Uranium. His thesis that the basic laws of economics would not allow the price of a valuable commodity (nuclear energy still creates tons of demand for uranium around the world) to stay below the cost of production was logically sound but was taking a while to work out.

We added uranium producer Cameco to the Market Timing Portfolio when it debuted in November 2016.

On December 21, our favorite Quant, Meb Faber, wrote about uranium comparing it to coal stocks at the end of 2015.  Coal stocks en masse doubled in 2016.

The timing couldn’t have been better, Cameco is up 24% since Faber’s post and up more than 40% since it was added to the market timing portfolio.

The market timing portfolio as a whole has massacred the market, and good thing too, because the other portfolios have seen performances ranging from satisfactory to FUBAR.  In addition to Cameco’s massive return, our trades in the Russian, Polish and Brazilian ETFs are all up more than 15%.

Nice.

As for the other portfolios here’s the summary:

$7.99 ‘ template=’ProductLink’ store=’valueinvesand-20′ marketplace=’US’ link_id=’72382a35-e6ae-11e6-ab4a-c91505899412′] starts off strong… almost

The portfolio had four 5% gainers and two 10% gainers in its first month.  The S&P returned 2.4% in the month, so this should’ve spelled market beating returns for the new portfolio.  Unfortunately, Tesla has spiked 20% in the month and our short position in it has dragged the portfolio down.

Let’s look at why I think Tesla will soon return to saner levels.

You may recognize several of these indicators from the Fitbit chapter of the book.  In the book I used them to show how oversold Fitbit was and why reverting to the mean would push it higher.

Tesla’s chart shows the opposite.

Both the RSI and Stochastics show it as hugely overbought and the Bollinger Bands show that is hugging the upper band.  This price jump increased prices to levels not supported by the past price history.  I actually stopped out of a Tesla short in my personal portfolio due to it.

I believe the key to identifying when the stock will drop back to normal levels lies in the MACD.  When the MACD line crosses below the signal line I will look to reestablish my short.

Learning a lesson about option stop losses

I noticed earlier this week that I hadn’t updated my personal portfolio on the portfolio page in a while.

It’s on there now if you want to check it out.  Without a doubt you will notice a few 70+% losses it sustained in some gold miner trades.

Not the best look.

I did learn some good stuff to add to my option trading strategy, however, so let’s go over that.  If you hadn’t read it before, here’s the strategy.

In September last year, I purchased a basket of gold miner calls that expired in 6+ months.  The buy decision worked perfectly with my trading strategy and I had a fundamental and technical basis for each trade.

Unfortunately, Donald Trump getting elected killed the price of precious metals – driving the prices of all my calls well below the trailing stop.

“No biggie,” I thought, “I can ignore the stop here because the expiration is so far off it’s bound to get back to break-even at least.”

So I held the stock and each morning checked the portfolio just to see worse and worse results.

Here’s the issue: the price of the options collapsed so far that the daily drop in price for getting closer to the expiration (this is called time decay) often exceeded any potential increase in the price for the stocks going up.  Additionally, getting back to break-even is far harder than it sounds.  For example a 20% drop requires a 25% gain to the new lower prices to break-even.

50% requires a 100% gain and 70%, to which a couple of these options fell, requires a 233% gain.  Not good.

Going forward, I will respect the stop loss even if the expiration is pretty far off.

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