Best of Newsletter December 2016

Each week I send out a free email newsletter, you can subscribe over to the right or at the end of the post. 

How to Hack Wall St. On Sale

As promised, I have set up a sale for my first book, How to Hack Wall St.  The sale will start on Tuesday, December 6.  The book will cost just 99 cents.  On December 9, the price will jump up to $1.99 and then on December 13 it will return to the current price of $2.99.  I will send a reminder email on Tuesday when the sale starts.
For more on the content of the book, jump to the break below.  Before the break I will tell the story of how the book came about.
At some point in 2014, I read a Quora answer from James Altucher on the best way to start an online business.  His answer was with eBooks.
Experts – and everyone is somewhat of an expert on something – can write a series of eBooks on a topic, start a website on that topic, use the eBook to create a mailing list and then use the mailing list to drive sales of future eBooks, affiliate products, etc.
This piqued my interest.  I had written tons of blog posts in the past and at the time was in search of a friend to send investing and economic rants to.  Why not combine these two interests?
So I used maybe 20 pages of special situations articles I had written in the past, added some case studies and some more special situations, created a portfolio and published the book.
Not a whole lot happened.
I shared the book on Facebook and LinkedIn – though I was too afraid to tell more than two or three people at work about it.
Over time I have sold maybe 40 copies of the book.  I did a paperback version and signed copies for some of my parents’ and Grandpa’s friends.
One day I went to look at the book Amazon page and two terrible reviews had appeared.  Both complaining about the lack of drilling down I did into the strategies – despite the fact that the description shows a $3 book of 40 pages. Oh well.
Going forward I will continue to manage and update the portfolio that was established in the book.  The book is still relevant and I still subscribe to the strategies in it, but I still plan to write a second version cutting out some chapters and adding more content.  So, if you end up purchasing a copy, please consider leaving a review.  Need to get that average over 1.5 :-/
Filling out the Special Situations Portfolio
In honor of this amazing sale, I decided to use some of the cash hoard that has built up in the portfolio and found three ultra exciting muni-bond closed-end funds trading at a discount.  Nice.  You can find the article about them here.
Confessions of a Teenage Investor Sample
As some subscribers know, I have been working on my next book, Confessions of a Teenage Investor, for the past several weeks.  You can find its introduction here.

The book is a traipse through old blog and message board posts I made in my teenage years as I was learning investing.  I have gone through and copy edited the posts and added footnotes in order to make fun of myself, update returns of specific stocks and highlight lessons to be learned from each of the articles.
Below is a sample post I wrote in December 2005 on American Eagle, which was my favorite clothes brand at the time.
As you’ll see, my analysis often had good intentions and a good foundation – but in the end it was almost always totally off base, simply because I was chronically too optimistic about brands that I used and loved.

WEDNESDAY, DECEMBER 21, 2005

American Eagle, like Warren Buffet

I recently finished reading How to Pick Stocks Like Warren Buffett: Profiting from the Bargain Hunting Strategies of the World’s Greatest Value Investor.

The third part of the book is about analyzing companies like Buffet, here I will analyze a company that currently interests me: American Eagle.[1]

Valuation

The first chapter is about valuation, mainly Discounted Cash Flows. I’ll use 12% as my first five years growth, 8% for the next five years, and 3.5% terminal growth. $366 million will be my cash flow number.[2]

 

> Five Years 8%

Terminal 3.5%


Discount Rate 11%
Year Cash Flow Discount Cash

1 $409.92 1.11 $369.30
2 $459.11 1.23 $372.62
3 $514.20 1.37 $375.98

4 $575.91 1.52 $379.37
5 $645.02 1.69 $382.79
6 $696.62 1.87 $372.44
7 $752.35 2.08 $362.37
8 $812.54 2.30 $352.58
9 $877.54 2.56 $343.05
10 $947.74 2.84 $333.78
First Ten Years $3,644.29


Add Terminal Value $4,606.16

Intrinsic Value (Per Share) $54

This model gives a value of $54; more than twice the current value. But the DCF is not all powerful, and sometimes ignoring is better than relying.

Book Value

Mr. Vick says book value is Buffet’s favorite yardstick for growth. Here’s American Eagles ten-year book value growth numbers:

 
Year Book Value Growth Earnings Growth
1996$71.10–
1997$90.8027.71%230.51%
1998$151.2066.52%177.44%
1999$264.5074.93%67.65%
2000$367.7039.02%3.42%
2001$502.1036.55%12.47%
2002$577.5015.02%-15.92%
2003$643.7011.46%-32.36%
2004$963.5049.68%255.50%
2005$1,136.3017.93%27.47%
Average37.65%80.69%[3]

American Eagle’s book value growth is extraordinary. The growth was consistent, as compared to earnings growth which was powered by four main years. However there are bad ways a company can grow book value, I will examine those now.

Issuing Shares

Companies can easily grow book value by issuing more shares. While this grows cash, it also dilutes the value of shares. American Eagle has 15% share growth during the past ten years, compared to book value which has grown a total of 1,498%; share dilution is not a problem.

Acquiring other Companies

I also don’t believe AEOS has been acquiring other companies to fuel growth.

Letting Profits Sit Gathering Interest

American Eagle has been sufficiently investing cash back into the business. Quicken estimates American Eagle has created $4.98 in market value for every dollar of retained earnings over the past five years.

Return on Capital

Return on capital shows the life-blood of a business. I will use Net Income / (Average Equity) + LT Debt. I will use a method described in the book to see what earnings growth is needed to sustain its current ROE.

American Eagle’s current ROE is 20%.

Assuming Equity will grow about 21% a year American Eagle must grow earnings 14% a year to sustain a 21% ROC. The industry’s current ROC is 15%, American Eagle is above this, but it could do better, and may have a hard time in the future maintaining a good ROC.

Hurdle Rate

The book says Buffet looks for a ten-year hurdle rate of 15% CAGR before investing. I’ll go a little further and look for 20% CAGR over 5 years.[4]

Over the last ten years American Eagle has had an average P/E of 19.6x, I will use this to project the future price for my hurdle rate calculations. I’ll also assume a twelve percent earnings growth rate, and a 15% dividend payout.


Expected 2010 price $ 54.59
>> Dividend $ 1.69
Total Dollar Amount $ 56.28
Expected 5y Return 168%
CAGR 21.79%

American Eagle passes the hurdle rate test, if it can grow earnings at a twelve percent rate for the next five years, and then trades at a P/E of ~19.6 the compound annual return should be about 22% per year – not too shabby.[5]

Putting Growth in Context

Even Buffet admits estimating growth for a company, outside short periods, is not exactly a walk in the park.[6]

Vick suggests using Quicken’s stock evaluator to judge the earnings growth necessary to justify the current stock price – inversing the DCF.

Using a 15% discount rate the stock evaluator says American Eagle must grow its earnings only 2.3% to justify its current stock price.[7]

Comparing Stocks to Bonds

Buffet won’t buy stocks unless its earnings yield (e/p) is greater than an average bond yield.

Using Morningstar’s yield comparison I see American Eagle’s earnings yield is almost double that of a 30-year T-Bill.

[1] I had an embarrassingly strong reliance on American Eagle clothes in High School.  The clothes I wear today is slightly better and almost always has a Packers logo on it.

[2] We’ll have to make-do with the numbers from the past ten years because that’s all Morningstar has.  The average growth for the first five years was -10% on 1% average revenue growth.  The second five-year period boasted stronger revenue growth at 2.5%; this did wonders for a scorching cash flow growth number of 10%.  The ten-year average was -18%.  Whoops.

[3] This growth collapsed harder than a ____, for the past ten years, book value growth averaged -3% per year.  This was due to excruciatingly bad performance.

[4] So far the main lesson to be learned from this analysis is to require 20% annual returns from teen-based retailers.

[5] American Eagle failed both goals massively.  As before shown income crashed like an asteroid that Bruce Willis was on and the current PE, at 13.5x, is almost 50% lower than expected.

[6][6] Talk about a prophetic statement following a batshit crazy one.

[7] As I have made clear, it couldn’t even achieve that easy goal.

Trade Like Warren Buffett Notes
For whatever reason self-help guru James Altucher has disavowed his older trading/investing books, including one of my favorite Buffett books: Trade Like Warren Buffett.

In a sea of bland-same-old-conservative-value-Buffett-books, Altucher’s evaluates the out of the ordinary strategies Buffett pursued and ends the book with interviews of two of my favorites hedge fund managers: Mohnish Pabrai and Zeke Ashton.

I have devoured this book at least seven separate times and much of it led to the techniques I wrote about in my first book.

The strategies that Altucher describes include: Merger Arbitrage, Relative Value arbitrage, Junk Bonds, Closed-end fund arbitrage, PE ratios and market timing and disasters.

Portfolio Review
As I repeat endlessly in these emails and tell myself during lazy Sunday nights when I would prefer to lie down and watch football, the creation and consistent following of several portfolios is the backbone of this site. Followed closely by run-on sentences.
My goal is to establish strategies that combine passive and active elements, and I have several along that fit that description. The most passive is the asset allocation portfolio, which gets re-balanced once per year (and we’re doing that today!) The most active is my personal portfolio, in which I have several long-term names and several trades (and we have a new trade today, what a deal!).
To find all the portfolios, visit the portfolio page on the website.
Note: we will not update the Hack Wall St. Portfolio today – we just went over it last week and I’m sure the twelve people who read that have had enough Wall St. Hacking for the month.  If you’re really into Wall St. Hacking, here’s the article that I wrote last week.
Asset Allocation
We’ll start with the fun one.  Our asset allocation portfolio is an attempt to diversify away asset class and geographic risk, while also earning a consistently strong return over time.
The strategy includes an annual re-balancing – taking money out of potentially overpriced asset classes and putting it into undervalued ones.
Here is the what we had to do (the portfolio had an original fake value of $100,000):
Junk Bonds -$79.76
Emerging Mkt Bonds $148.81
Gold & Silver $1,541.30
Commodities $15.37
Oil Stocks -$304.55
REITs $466.34
Int REITS $742.58
Dividend Stocks -$274.12
Global Momentum -$84.19
Shareholder Yield -$1,367.60
Global Value -$664.65
CASH -$139.55
Positions with positive values had more shares purchased, which were funded by the sales of positions with negative numbers.
The Shareholder Yield and Global Value ETFs, which both had positive gains (Shareholder Yield was up 11%), are doing the most work in the portfolio. They make-up for the piss poor performance in Gold & Silver and the REITs.
Market Timing
We debuted the Market Timing portfolio in the last exciting portfolio review letterand it has since taken off like a rocket.  I should quit my job and start timing the market tbh.
An 18% gain in our Uranium minor, Cameco, and a 12.4% gain in the Russia stock market ETF has pushed the portfolio return to 3.5% – blazing past the S&P 500 return of just 3%.
Investors were pleased with Cameco’s third quarter results and I can only assume formerly scared investors charged into Russian stocks following the incessant articles about its government influencing the US election. If you can hack the DNC’s emails, why can’t you run a profitable oil company?
My Portfolio
There’s only one new trade this month (new readers can find my trading strategy here).  I’ve made hay in the past buying oversold story stocks and this trade should follow that same path.
Fitbit has fallen 70% this year and even more from its 2015 IPO price.  My fiancee and I have each loved tracking our steps and hated tracking our calories with the app and have become somewhat addicted to the weekly step challenges with friends and family.  I seem to diverge from the typical market thinking in believing that the company is building a strong network effect in its challenges, calorie tracking and scale integration.
So when I determined the stock was oversold (I spared you the pain of loading a bunch of stock charts in this email by putting them all in a post on the site) I lunged at the opportunity to build a position.
For the value guys, the stock trades for just 0.8x sales and 14.5x forward earnings, despite 585% revenue growth over the past two years.
I purchased one call with a Jan 2018 date and $5 strike for $3.40.  This is a $340 outlay.  At Fitbit’s current price, the intrinsic value of the call is $2.48.
If Fitbit manages to get to its 50 day moving average of $10.39, the intrinsic value of the call would be $5.39, if you add the same time premium/implied volatility that it has now, you get an option price of $6.31 which is an 86% gain on a 39% move in the stock.  If it gets back to its 200 day moving average, the option gain would be 180%.
I’ll use a 35% trailing stop loss on the position.
Christmas Presents
In a completely transparent attempt to earn some affiliate cash, I have pulled together a bunch of recommendations for Christmas presents to get for people who want to be rich.  And, really, outside of Jill Stein supporters, who doesn’t?  I’ve suggested four books (one for each of the site’s pillars) and two courses.  If you enjoy the site, try to buy the expensive courses; if not, still buy all of the books.  Read more here. 






 

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Best of Newsletter November 2017

Each week I send out a free email newsletter, you can subscribe over to the right or at the end of the post. 
In the last newsletter I talked about my 401(k) Pros and Cons Article.  That one is still one of my faves, so if you haven’t read it make sure to and if you have, go back and read it again, it’s still hilarious and informative.  Anyway, the sequel is How to Invest your 401(k).  This one isn’t as entertaining, but it’s definitely still informative.
A Bunch of Book Lists
Book list is definitely my favorite article type.  I get to revisit fun books and passive aggressively criticize ones I leave off the list.  Plus, as an Amazon affiliate, I get like 4% or something of the book price if people actually buy books off my list.  Free money.
So, while the Packers were breaching yet another level of mediocrity or, really, outright excruciating horribleness today, I sat down and created five books lists. The first has a relatively boring title but they get progressively better after that.
There are also bonuses in a few of the articles (spoiler alert: all of the bonuses are books I wrote or affiliate products).
All in all that’s 29 books to read.  Great head-start on a New Year’s Resolution.
Portfolio Review
For new readers the best page to learn about my goals for my website is the start here page.  I talk about Pat Flynn, who is my role model for the guinea pig design of the site, and the different pillars of my plan to become rich af, and I lay out where to get started for each pillar.
The backbone of the finance pillar is the portfolios I track.  For most investors, professional and individual, active management is more a road to ruin than a road to lifetime success.  Unfortunately, this has led to a mass proliferation in passive investing strategies, driving up the prices on their member stocks to unappealing levels.
The portfolios I track span the spectrum of active vs. passive management, and they also seek to contain catalysts or other factors that preclude them from institutional impact.
This week is portfolio review week for the newsletter.  I will identify some key changes in the make-up and returns for each one and (start getting excited now) create a new one.  You can find the portfolios here.
Let’s start with:
My Personal Portfolio
I don’t vote.  The policy differences, in practice, between the two main US parties are so marginal as to not exist.  George Bush started the TARP program.  Barack Obama never shut down Guantanamo Bay and increased the number of American soldiers milling about in the Middle East.  Donald Trump will be the first pro-gay marriage US president.  Hillary Clinton is, possibly, the most Wall Street friendly politician in Washington.
That said, there were enough differences between the policy promises this year that there are ways to trade around the election of Donald Trump.  Take these suggestions with a dump truck of salt, of course, because the last several presidents have seen a 97% or so (anecdotally) difference between policy promises and results.
  1. Buy coal and sell solar – Even if you ignore the moderately more free-market stances of Trump, his complete denial of climate change makes you think there will be both a reduction of regulations on coal miners and a reduction in subsidies to solar companies (who cannot persist without them).
  2. Buy financials – All the backwards and unsuccessful regulations on financial corporations may be repealed.  It’s also possible that Trump will be snubbed by the Goldman CEO or something and nationalize all banks.
  3. Buy healthcare – If Trump follows through with promises to delete Obamacare and increase competition in the healthcare sector, look for an increase in profits in this sector, as well as multiple expansion as uneasiness about the future of the sector is reduced.

Five paragraphs in, we finally get to my personal portfolio.  On the Wednesday after the election, I put in trades to buy coal, short solar and short Tesla.  The short Tesla trade is the only one that went through, which is ironic because I don’t even highlight it above.  Here are some reasons for the short:

  • Government subsidies account for something like $20k per car sold.
  • The stock is the definition of story stock – retained earnings are negative, there is no free cash flow (even when not accounting for subsidies), everything is based on growth.
  • The growth prospects are not that great.  The company has a history of creating frustrating delays with a focus on the perfection of features that have an immaterial impact on the utility of the car.  Additionally, competitors with decades more experience building and selling cars have started to create electric cars that match or exceed Tesla in quality.
  • The company recently acquired Elon Musk’s failing solar boondoggle in an episode possibly meant only to screw short-sellers.
  • Currently trades for 10x book, 4x sales and 87x operating cash flow.   Gross.
Despite all of this, the short will only be a small percentage of the portfolio and I will enforce a strict stop-loss if it falls 25% – story stocks have a way of going up beyond all logic.
Hack Wall St.
This portfolio is the current remnants of my first book (spoiler alert, it will be going on sale next week).  The theory behind ‘hacking wall street’ is to find special situation strategies that have a catalyst or otherwise function outside of the workings of wall street institutions.
At various check-in points, the portfolio has out-performed the market. Now, not-so-much.  The gold miners plus Silver Wheaton allocation hit about 30% of the portfolio and then was throttled by the election results.
The post-election consensus is that, with Trump as president, interest rates will rise. This has pushed down gold and silver prices.  Here’s how that works:
  1. The value of a currency, like everything else, is determined by its supply and demand.
  2. When the federal reserve increases the rate that it charges member banks, the banks lend less money.
  3. This hits both sides of the coin: there are fewer dollars being used so supply goes down and the interest rate goes up so there is more demand for dollars.  Thus, the value of the dollar increases.
  4. Because gold and silver have a so-called intrinsic value they are used as inflation hedges.  When there is inflation (the value of a currency falls) the gold and silver retains their value and their price goes up.
  5. When the market expects the value of the dollar to increase, the value of assets used to hedge against it falling go down.
Precious metal holders still have a few things working for us.  These steps aren’t always followed like clockwork – many times the interest rate changes aren’t enough to affect how Banks lend.  Additionally, the Fed has threatened to raise interest rates in the last nine or so quarters and done it exactly once.  We’ll hold our shares.
The Asset Allocation Portfolio

The function of the asset allocation portfolio (which was established in my newest book and then pinned down in an article on the site) is to diversify among non-correlated assets.  All assets get into bubbles that at some time or another must pop; by not focusing in one, the volatility and drawdowns in the portfolio are reduced, which in turn increase the likelihood of investors sticking with a strategy over time and not hunkering down into a sub 1% savings account.

Unfortunately for this newsletter, reporting the month-to-month results of the portfolio aren’t all that interesting.  The portfolio was hit by the same gold and silver decline described above and has also seen bad returns in its real estate positions.  This is likely also a function of interest rate fears – if interest rates increase, the cost of purchasing and holding real estate increases and the attractiveness of fixed income assets increases.
The Market Timing Portfolio

Here is where the excitement comes in.  We’re debuting an all-new portfolio this week and you can read about it here.

DIY Financial Advisor

I loved Wes Gray’s book with Tobias Carlyle: Quantitative Value. I have been thinking about becoming a financial advisor and have been fooling around with different asset allocation models.  Imagine my surprise and delight when I found out he had another book (with Jack Vogel and David Foulke) combining the three.

The book is a very easy read (especially when you skip over the all the studies/back testing) and the authors do a great job simplifying complex strategies and creating solutions for investors at various skill and risk levels.






 

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Best of the Newsletter October 2017

Each week I send out a free email newsletter, you can subscribe over to the right or at the end of the post. 

Profiting From Elizabeth Warren Madness

The political world crapped a proverbial brick last week when noted economic ignoramus Elizabeth Warren suggested in congressional hearings that Wells Fargo CEO John Stumpf should lose his job over an aggressive and sometimes fraudulent consumer banking practice. The company fired 5,000 employees, it was fined $185mm and the stock responded to the controversy by dropping 12% in the past month.
Meanwhile, the employees fired represent less than 2% of those employed by the corporation and $185mm is just over 1% of last years operating cash flow of $14B.
Morningstar puts the company’s value at almost 50% higher than the current price, the stock trades for just 1.3x book and the dividend yield is almost 3.5%.  I will be looking to add Wells Fargo in each of the retirement accounts I manage this week.
Follow up the next week
One more thing, I hope you looked into starting some sort of position on Wells Fargo last week.  I purchased call options with a $42.50 strike price that are now up 56% on just a 3% increase in the stock price.  High five.
Overbought or Oversold 

When oversold the sellers of the stock (supply) have temporarily outnumbered buyers (demand). Obviously overbought is the opposite situation. The theory around these two terms is that at times the market will overreact in the short-term to some piece of news or even a rumor, driving the price past where it should go – in either direction. Here are the measures we use to find whether a stock has been overbought or oversold:

Relative Strength Index – RSI oscillates between 0 and 100 based on the speed of price movements. Over 70 is considered overbought and under 30 is considered oversold.

Bollinger Bands – Plots the mean price and two standard deviations below and above it over the period chosen. When the actual price is further than the two standard deviations away from the mean the security is considered overbought or oversold.

Full Stochastics – Shows the latest close relative to the high/low range over the periods chosen. 20 is considered oversold and 80 is considered overbought.

401k Pros and Cons
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.






 

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Affiliate Post: China and the holy trinity of growth stock criteria

 

When it comes to stocks, buying the best – at the right price – is worth it… especially in Asia.

There are a lot of ways to make (and lose) money as an investor. Some strategies are very complex. Others are common sense and simple to understand – but not always easy to implement… like the one I’m about to explain.

As a rule of thumb, if you invest in the best company in a dying industry, you’ll probably lose money. You’re fighting the tide and will probably wind up out at sea. And if you invest in an average company in a growing sector, things could go either way. (Of course, valuations matter here as well.)

But for the biggest gains, look to exploit the holy trinity of investing:

  • Find a sector that is showing exceptional, ongoing growth
  • Identify the leading company in this major growth industry
  • Buy the leading company when it’s cheap

Here are two examples to show how this works.

Apple blossoms

Apple shares (NASDAQ; ticker: AAPL) were trading for US$18 in the spring of 2009. And it just so happens that Apple met all three of the investment trifecta at that time:

1) Top Sector: Smartphone use was on the verge of exploding

2) Leading Company: There was no product like the iPhone, not to mention Apple’s other products

3) Cheap Valuation: Despite its growth rate and outlook, Apple stock carried a price-to-earnings (P/E) multiple nearly the same as the S&P 500 – in other words, it was valued the same as an average stock on the S&P 500, even though it was a leading company in a high-growth sector

If you’d bought Apple shares in the spring of 2009 when it met the three growth criteria, you would have made nearly 400 percent over the next three years (compared to the return of the S&P 500 of about 50 percent). And if you held on to the shares until today, you’d be up over 500 percent.

(Of course, “if only” is not a valid investment strategy (as in, “if only I bought Apple shares when they were just US$18”). We all have perfect hindsight – and if these decisions were always obvious and easy we’d all be rich.)

100 degrees of Baidu

Another example of exploiting these three growth factors is Chinese search engine giant Baidu (NASDAQ; ticker: BIDU). It’s like the Google of China – and the name in Chinese literally means 100 (bai百) degrees (du度).

In early 2013, Baidu was already China’s top search engine and shares were trading for US$90 each.

But even then, Baidu still met the three top growth criteria:

1) Top Sector: Internet search had been growing steadily for years and forecasts called for more of the same

2) Leading Company: Baidu had long before overtaken Google in China, the world’s fastest growing economy at the time

3) Cheap Valuation: Baidu stock’s P/E (price-to-earnings) ratio had pulled back to 20, a small premium to the market, despite its long growth history and positive outlook

Over the next year and a half, Baidu shares moved up nearly 200 percent.

At the time, Apple and Baidu were not undiscovered gems. They were already giant, successful companies.

While it appeared that their success would continue, at the time their stories felt stale to many investors – some of whom no doubt felt the need to discover new emerging companies to earn a big return. But ignoring the well-run market leaders trading at a reasonable valuation was a mistake.

This easy-to-understand strategy – identify a leading sector, find the leading company in the sector, buy when the stock valuations are cheap – isn’t so easy to execute. Is a high-growth sector slowing down? Has the leading company in the sector lost its way with a misguided strategy or management mistakes? Is the apparently attractive valuation accurately pricing in a slowdown in growth?

How to find big growth companies

The good news is, there are a lot of companies that meet these criteria in Asia at the moment.

To help you find them, our friends at Truewealth Publishing are launching a new research service focused on finding these kinds of sectors and companies in Asia. They’ve prepared a report outlining three of the best investment opportunities in Asia right now. What’s more, part of their (very affordable) package includes an exclusive interview with one of the world’s biggest investment legends – who is himself a huge proponent of Asia.

To find out more, and to sign up for this incredible opportunity, please click here.

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My 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 gave up on them ever being used.

Now that I 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.

I talked a little about Fiverr in my second book and the strategies to making money on the site.  The basics are to create some quick consulting gig, like designing a book cover, editing or transcribing, etc.  and then adding gig extras to up the price.

The two gigs are both stock related and are useful for anyone wanting a quick summary of a stock to reference.  The first is a  one-page report with stats, a stock price chart, financials, business description and key executives.  This is great to collect for each company in your portfolio to keep them in line.

The second is a comparable valuation analysis.  In this I select several multiples and compare the subject’s to comparable companies and project out what the stock price would be if it traded at those multiples.

Both have ultra fun add-ons for me to do even more analysis for even more straight cash.  Nice.

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Fitbit is Oversold

In writing my weekly newsletter this week, I realized that adding in pictures of charts was more work than it was worth and that many people would skip over that party anyway.  So, here is a glimpse into the fun thought process behind my trades that you would typically only get in the newsletter.

Before we start, go read this article to learn about how I trade and what the different things in these charts mean.

This first chart has a cluster of overbought/oversold measures on it.  Fitbit is just 17 cents above the lower Bollinger Band and both the RSI and Stochastics show over sold levels.  It is worth noting that each of these have shown oversold since the stock’s massive drop in November.

This chart shows all the important moving averages.  Fitbit’s price is the black and red line on the bottom, up from that is the 20 day ema, 50 dma and 200 dma.  It’s obviously bad for the trend that the price is below all three.  However, the MACD on the bottom has crossed over the signal line and has diverged from the stock price – both of these are buy signals.  When the MACD crosses over zero and/or the stock price crosses over the 20 day ema look for it to jump.

 

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Christmas List for Someone Who Wants to be Rich

In a completely transparent attempt to earn some affiliate cash, I have pulled together a bunch of recommendations for Christmas presents to get for people who want to be rich.  And, really, outside of Jill Stein supporters, who doesn’t?  I’ve suggested four books (one for each of the site’s pillars) and two courses.  If you enjoy the site, try to buy the expensive courses; if not, still buy all of the books.

Books

I Will Teach You to be Rich by Ramit Sethi is my favorite personal finance book.  Most personal finance books feel like going to confession – you just feel guilty and empty after.  Ramit tells readers to get credit cards, to spend money on Starbucks if they want and even how to ask for a raise.  If you only get one of these books, make it this one.

One Up on Wall St. by Peter Lynch.  I struggled for a few minutes to decide what investment book to recommend.  Many of my favorites would fly well over the head of beginning investors.  Lynch’s book is simple and written well enough to hook even the staunchest anti-vaccer (going with a Jill Stein joke again there if you didn’t catch it) and has enough wisdom to be worth countless re-reads.

Economics for Real People by Gene Callahan was the first book I read that really made me feel like I ‘got’ Austrian Economics.  Before this book, I sort of understood supply and demand, minimum wage stuff and even bits of the Austrian Business Cycle Theory – but I didn’t have the all-encompassing “start with a lone man on a desert island (in this case Richard Hatch from Survivor) and build all of economics from that” grasp  on it that I had after reading this book.

How to Start a Successful Blog in One Hour by Steve Scott is self-explanatory.  Anyone wanting to earn money online needs to get past this step.  The book’s also really cheap.

Courses

Tom Woods’s Liberty Classroom is my go-to at work anytime I need to do some mindless data entry type stuff for a while and want to learn about interest rate theory, why some president from 1860 was terrible or why the Robber Barons were good. Nothing on the internet will teach you Austrian Economics or libertarianism better.

Top Business Courses- How To Become a Bestselling Author on Amazon Kindle  is also a go-to for me, whenever I publish or start work on a new eBook.  The course has tons of sections, showing how to format Microsoft Word correctly, actually brainstorm good ideas and write consistently, upload your book to get an electronic and paperback version and how to market it effectively.

BONUS PRESENTS

I can’t ever dodge the chance to add my own books to any of these lists:

How to Hack Wall St. Four Steps to Retiring a Millionaire

 

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Book Notes: Trade Like Warren Buffett

For whatever reason self-help guru James Altucher has disavowed his older trading/investing books, including one of my favorite Buffett books: Trade Like Warren Buffett.

In a sea of bland-same-old-conservative-value-Buffett-books, Altucher’s evaluates the out of the ordinary strategies Buffett pursued and ends the book with interviews of two of my favorites hedge fund managers: Mohnish Pabrai and Zeke Ashton.

I have devoured this book at least seven separate times and much of it led to the techniques I wrote about in my first book.

The strategies Altucher describes include: Merger Arbitrage, Relative Value arbitrage, Junk Bonds, Closed-end fund arbitrage, PE ratios and market timing and disasters.  My notes on each will follow.

Merger Arb

Merger arbitrage is the technique of purchasing the stock of a to-be-acquired security when it trades for lower than the price of the announced merger, while shorting the acquirer to hedge, to gain the difference.

Risks involved in the arbitrage include:

  • Due Diligence risk – risk that the acquirer will back out of the deal when it finds something bad during the due diligence phase.
  • Regulatory risk – risk that governments will block the deal.
  • Another acquirer showing up – this would kill the short hedge.
  • Interest rate risk – risk that the amount of time it takes for the deal to close will push the return below the risk-free rate.

To calculate the potential return in the deal, use the formula: V = P((D-T)/T); where v = the value of the deal; p = the probability of the deal completing; d = the deal price; t = the price we pay for the target stock.

Relative Value Arb

In relative value arbitrage investors find a company where the sum-of-the-parts value is great than the current market value of the company, purchase the company and then short the parts.

For example, if Price Industries had holdings worth $150mm in Kelsey Farm Corp, $100mm in Packers Are Just Alright, Inc and $50mm in Not as Interesting of a name, LLC the sum of the parts valuation would be $350mm.

If the market value of Price Industries was $300mm there is an obvious gap to be arbitraged away through investors purchasing shares in Price.

Of course, it is also possible the value of the holdings could fall, therefore arbitrageurs short the holdings and then hold both positions simultaneously until the gap is closed.

Junk Bonds

Junk bonds, or distressed debt, is the publicly traded debt of companies given a poor rating by credit rating agencies.  Because the agency gives the company a material chance of bankruptcy before the debt can be repaid, the interest rate of the debt is higher than typical corporate debt to attract investors willing to take on the risk.

Per Altucher, in junk bond situations Buffett does not go through the typical rigmarole of evaluating the quality of the business or is sustainable competitive advantages; he simply evaluates the business’s ability to pay back the debt.

With distressed debt, it is important to keep in mind that the day-to-day, even year-to-year, volatility of the debt is, in the end, irrelevant.  The debt will do one of two things: make its payments and pay back lenders or default.

Closed-End Fund Arbitrage

Find the site’s closed-end fund strategy here.

Market Timing

Despite Buffett’s constant statements that he does not attempt to time the market he had, at the time of this book’s publishing, made market calls in 1969, 1974, 1979, 1986, 1992, 1999 and 2001.

Altucher tries to tie these market calls to value ratios like P/E and P/Book and to the so-called Fed Model where investors buy stocks when the earnings yield (E/P) is higher than bond yields, but fails to establish a successful trading system using either.

It seems Buffett’s market calls are valuation based but are more based on his personal feel than on a direct ratio.

If you’re interested in learning about market timing, I devoted the final chapter in my most recent book to various value based indicators.

Disaster

Every time some sort of disaster happens (e.g. 9/11 or the housing crisis) Buffett is on TV soon after declaring the stock market will return.

Altucher finds that, for the most part, when there is a disaster and the market panics in the short-term it bounces back fairly strongly over the next month and six months.

Altucher even shows a trading system where traders purchase any stock that falls 10% in a day and it outperforms buy and hold by a factor of over 5.

You can buy the book here.

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Filling out the Special Situations Portfolio

Earlier this year I put out a special report to add several positions to the Hack Wall St. portfolio and dismiss a few.  The report left about 25% of the portfolio in cash, which is where we stand today.  To access this report, which discusses the addition of several country ETFs as well as Ferrari, subscribe to my newsletter.

Even earlier this year, my now fiancée and I managed to save a down payment for a new house in just six months partly by using closed-end municipal bond funds.  Our strategy was to pay $1,500/month to ourselves in rent and send it all into a brokerage account where it would be invested.

The savings part was easy enough – we just had to commit to it.  The hard part was deciding how to invest the money.

We could pick blue-chip stocks paying dividends, but even the least volatile blue chips could lose 20% suddenly with little or no warning.

We could just keep the money in a savings account or use short-term CDs, but the people who do that don’t run personal finance websites.

We could sell puts on blue chip stocks using the cash as collateral, but again there is an, albeit slim, potential for a huge loss.

Our selection was Closed-end funds (CEFs) holding municipal bonds that trade at a discount.  We get conservatism with the municipal bonds – if they defaulted we probably wouldn’t be looking to buy a new house either way.  We also got an alright return with a 4-5% non-taxable yield; this converts to about 6% for a taxable asset.  Finally, we picked closed-end funds that traded for a discount to their net asset value (NAV).

Here’s how that works.  The net asset value is the actual value of the holdings in the fund – in our case it would be the value of the municipal bonds and any cash in the fund.  The fund trades on the open market, so depending on the feelings of the market it can trade below (discount) or above (premium) to its net asset value.

Many closed-end funds will trade at discounts their entire life – or at least until an activist gets a controlling share and riles up management.  With municipal bond funds, the asset value has so little certainty that it is very likely that at some point the fund will trade at a premium or at the NAV.

This worked out for us.  Including the yield and the reversion to the mean, we earned about 8% in just six months holding the CEFs.  All in all, the return subtracted about a month from the amount of time it took to save.

I’ve written about the mechanics of this strategy before and how to find and evaluate funds and what types of portfolios this strategy works in. You can find that article here. 

In the past couple of months, these CEF opportunities dried up.  The strategy obviously works, so investors were piling into it.  However, following election day, the market became convinced that interest rates would rise – which pushes bond prices down – and many muni bond CEFs fell in price and now trade at a discount.

Using the method described in the article linked above I found three good opportunities: NXP, AKP and VPV.  We will put 5% in each and sell if they hit a 5% premium or we find a better opportunity for the portfolio.

For the current portfolio, visit this page. 

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Debuting the Market Timing Portfolio

In 4 Steps to Retiring a Millionaire I talked about some ways to use valuation to time markets.  I thought it would be useful to follow a portfolio on the site with some market timing trades.

Before we start, I’ll hedge with the fact that I don’t expect this portfolio to wallop the market.  In fact, I wouldn’t be surprised if it does poorly.  To start I won’t be using any trend or momentum indicators and deeply undervalued assets tend to get even more deeply undervalued for a while.

The From-the-Book-Ones

ProShares Short High Yield

Interest rates are at near a generational low, as they go up bond prices will go down – especially junk bonds.

Platinum & Palladium

Historically, platinum has traded at a premium or slight discount to its precious metal cousin, gold.  Right now, gold trades for $1,208/oz and platinum trades for just $925.50.

Uranium

The Uranium price has fallen 80% since Fukushima five years ago.  In the mean-time nuclear power sources have turned to secondary sources to purchase uranium.  Eventually the secondary sources will run out and the price will necessarily go up to allow producers to earn a profit.  We will use Cameco.

Coal

The price of Coal has fallen 64% in the past five years and 76% since July 2011.  Much of this is due to the attempted creation of alternative energy sources and the increased regulations on the industry.  Regardless, of how this works out, it is likely the price of coal is too low.

Some CAPErs

CAPE stands for cyclically adjusted price to earnings ratio.  The ratio is calculated by dividing the current price by the average earnings over the past ten years.  Averaging out ten years of earnings smooths any cycles that are either artificially inflating or deflating earnings at the current time.  We’ll include all countries with current CAPEs below 10x.

The current countries are: Russia, Brazil, Czech Republic, Poland and Turkey.  Unfortunately, there isn’t a good option for investing in the Czech Republic.

As always, the portfolio will be tracked on the portfolio page.

 

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