Finished The Yearly Rebalancing of My Portfolio

Today I finished rebalancing my portfolio, as required by the Stock Trading Riches system. This involved buying or selling each stock that was under or over my constant value target by at least 10% - so that each stock position was now at the constant value.

This year, I did it in two parts: sales last Friday and the buys today. This was because I now keep the majority of the cash portion of my portfolio invested in a no-load short-term bond fund.

After selling the gainers, I then calculated how much more money I would need to complete the buys, and then placed a sell order for the mutual fund on Friday. Today, the mutual fund sale proceeds were in my account, and I used them to complete the buys.

Read More

The Importance of Stock Market Capitalization For Building A Diversified Portfolio

Stocks can be separated into 4 groups, according to their market capitalization:

1. micro caps - below $300 million

2. small caps - between $300 million and $1 billion

3. mid caps - between $1 billion and $5 billion

4. large caps - over $5 billion

I talk in more detail about market cap analysis in my book Stock Trading Riches because it's important for investors to allocate their portfolios among all market caps to provide diversification, avoid cyclical returns, and take advantage of "regression to the mean" (e.g. one market cap segment outperforms another, but then they converge).
Market cap is calculated by multiplying the number of shares outstanding by the share price. For example, if stock ABC issued 6 million shares, and the price of each share is $6, then ABC has a market capitalization of $36 million.

In general, micro caps are new companies that are just hitting their stride. Small caps tend to have their infrastructure in place and are in growth mode. Mid caps are big regional or national companies. Large caps tend to be established multinational corporations.

Stocks within each market cap share important characteristics in the areas such as growth rate, risk, dividends, visibility, and international exposure.

Read More

Successful Traders and Investors Keep Their Emotions in Check

To succeed while trading the stock market, you need to be able to control your emotions. You can't become angry or fearful when you are on a losing streak. Alternatively, you can't become euphoric or greedy when you are winning.

Individual stocks, the stock market itself, and trading systems all run on cycles. They will enter money-making modes some of the time and then, without warning, switch.

The only thing we can predict 100% is that, whatever the current state of the market, it will eventually switch, and then eventually return.

If you jump out of the market when it is down, there is a good chance that you will miss the rebound. Similarly, if the market has been strong for a long time, and has reached fantastic heights, you can't become greedy and buy a lot, because the market may fall.

To keep myself from trading impulsively on emotion (and losing), I developed a simple trading plan that lightens my positions as they reach high levels, and starts scaling in as my positions go down.

As a result, I built up my positions at good prices, and scale out as the market goes higher.

Read More

Stock Trading is Like Football - They Both Require Patience

When I was younger, and played the early versions of electronic football, I almost always went on fourth down - even from my own side of the field. I wanted to score quickly and often, and rack up points. What usually happened, however, was that I was stopped and ended up losing the game because the opponent always had better field position.

Now, being older and wiser, I always root for the Bears (my hometown team from Chicago) to play safe and conservatively. I would never think about going on fourth down unless it was late in the game and my team was behind. Also, when my team is looking at long 3rd downs (such as 3rd and 15), I don't automatically expect them to try a long pass. I'm ok with them gaining a little yardage, punting it away, and waiting until the next possession.

Similarly, you have to be patent when stock trading. When I was younger, I wanted to see success right away. I ended up losing a lot because I day traded and used futures, options, and margin trading to leverage my way to success.

My profits went up (and my stress down) when I stopped trying to make quick profits. Instead, like football, I started playing safely and conservatively.

Since day trading left me stressed with no edge, I switched to long term trading, which I found suited my personality much better. I also stopped using margin, futures, and options because they masked my edge. They left me dependent on short term luck to avoid margin calls.

I realized that one of the reasons I was impatient to day trade and make profits was that I didn't trust longer term trading systems. So, I took a few years off trading and did nothing but system design and testing until I proved to myself that my long term trading system had an edge.

I designed the system to suit my personality and needs. I then became passionate and excited about trading my system and knew that I would make money over the long term - even if I could not see profits in the short term.

Read More

Successful Investing is Not Just About Good Stock Picking - You Also Need to Buy Low and Sell High

If you want your portfolio to beat the market over time (generating a better return with less risk), then picking good stocks is just part of the answer. In fact, you don't need to hit home runs by picking the next potential Microsoft or Apple.

You need a trading system that buys low and sells high (Looking for chart patterns is not a way to do it).

Here are 3 reliable ways:

1. Identify a stock that is about to undergo a dramatic shift. This goes beyond studying fundamental data to find good companies. You are also trying to time big moves up or down. This is the hard way to trade because, not only do you need to study the facts, but you have to figure out how the market will respond - not an easy task.

2. Evaluate the stock like a business. You calculate the intrinsic per share value of the company, and compare it to the stock price. Buy when a good company is under valued and sell when the company is overvalued. This is the system that Warren Buffett uses. It requires you to possess a high degree of financial and business knowledge. You also must spend a lot of time doing research. Unless you have an MBA and/or a background as an analyst, it is hard to really get a good edge.

3. Have an automated formula that scales in and out of stocks. This is the method that I use for trading, and I believe it is superior because anyone can use it. You don't need a lot of financial knowledge and time spent in research - only the discipline to stick with the plan.

With this method, you always have a base position in a good company, and increase or decrease the size of your position, depending on the change in the current stock price. Because you are not making a few large trades, errors caused by buying too high or selling too low are self corrected over time.

Read More

The Scaling Flaw That Affects Trading from Chart Patterns

Many traders use charts of past prices to trade stocks. They feel that, if the chart makes certain patterns, it can predict what the stock is likely to do in the near future.

One of the problems with chart reading is that pattern recognition is fairly subjective (the human brain likes to organize random data into pictures). One trader may see a pattern where another one doesn't. This makes charting-based trading systems hard to test.

However, studies that have been done using objective definitions of patterns consistently detect no trading advantage. They show that trading on chart patterns are equivalent to buying randomly.

I think that another flaw of chart based systems, which nobody really talks about, is scaling. Chart scaling, in my opinion, is the reason that patterns looks so seductive and accurate in hindsight.

Traders develop patterns by studying charts of big moves that have already occurred. They frequently "see" consolidations and patterns before the big moves.

For example, one pattern is called sideways consolidation - where the market trades almost horizontally in a narrow range. Then, prices eventually "breakout" and make a big up or down move.

The problem is that, after a market's range has expanded, the scaling of the chart changes as well. This scale change smooths out the movements that occurred prior to the big move, and creates the sideways consolidation. Prior to the big move, traders would not have seen the sideways consolidation, because the chart scale would have been different.

Let's assume that the market moved in a range between 10 and 20 for 6 months. The chart would be scaled from 10 to 20, and the chart will show lots of peaks and valleys. After the market moves to 85, the chart now reflects a range from 10 to 85. This compresses the peaks and valleys between 10 and 20. The result is that the 6 months before the move looks like a sideways consolidation pattern.

Unfortunately, you can't trade on patterns that occur after the move.

This is why my trading system does not use charts - only prices. Numbers are objective, and not open to interpretation. I only use charts to find prices for stocks I want to back test using my spreadsheet.

Read More

"Stock Trading Riches" Spreadsheet

Yesterday, I received an email from a "Stock Trading Riches" reader who had a question about the spreadsheet (it is a free download for people who buy the book, in either format - paperback or kindle).

His spreadsheet question was:

In the "number of shares" column I notice that you are checking for a 10% price change between the current years price and the previous years price. This is ok in Year 1 and Year 2 but in the longer term you are not comparing the current years price to the initial Year 1 price. So what could happen is you could have a steady increase/decrease of less than 10% every year over a number of years (cumulatively > than 10% over a number of years) but none of them will trigger any selling/buying as the price is being compared to the prior year. Was the sheet deliberately designed this way?

My answer was:

What the basic system does in real life is only rebalance if the stock has moved 10% or more from the last time it was rebalanced. So, the spreadsheet should actually not compare the current and previous values, or the current and first. Instead, it should compare the current value with the last value where a rebalance occurred.

I don't know how to do that in Excel. So, I put the 10% check between the current and previous row just in case a value isn't 10% apart. But the best way to use the spreadsheet is to manually exclude prices less than 10%.

So, if the monthly prices were 100, 99, 95, 97, 85,... you would put in 100, 85 in the spreadsheet.

Read More

The Best Trading Systems Are Beautiful and Simple

The best trading systems are simple and minimally beautiful - at most, they only use a handful of indicators or formulas, and they implement a simple model of the market.

They don't aim to explain market behavior rigorously and precisely like an economist - instead, the model aims at robustness, where it lets you manage your risk appetite and set the odds in your favor.

The purpose is to give you an edge - like the house has in a casino game. It won't win every trade, but it will have a positive expectation where, over time, you can expect to make more money than you lose, thus letting you build your account over time.

If a trader attempts to develop a complex system that could win every trade, then that is a set-up for failure. As systems get more complex, they have more moving parts - which results in unpredictable interactions and bugs that will eventually cause your system to blow up and suffer heavy losses.

With a simple system, your ego may not be satisfied - it will tell you that you are smart enough to come up with something more accurate, so you will lose less trades - but your bottom line account balance will benefit.

Read More

Why I Renamed My Blog To "Stock Market Zen"

Today, I renamed my blog from "Simple Trading System" to "Stock Market Zen" (however, the URL will stay the same).

I did this because I think that "Stock Market Zen" better reflects my philosophy and approach to the stock market and investing.

The old title described my system accurately, but very generically. A lot of trading systems can be simple - but many of them don't rely on concentrating on the present moment, and relying on the last price instead of a moving average or chart.

Read More

How To Use "Stock Trading Riches"

I hope that my book helps you build a trading system that suits your risk-reward level.

I have exclusively used the basic Stock Trading Riches system on my portfolio for the last 6 years, and I have beaten the S&P 500 over those 6 years:

Year, Me, S&P 500

2005, +13%, +4.91%

2006, +14%, +15.79%

2007, +22%, +5.49%

2008, -40%, -38.49%

2009, +44%, +23.5%

2010, +22%, +13%

My portfolio had a cumulative six-year return of +65.66% vs. +10% for the S&P500.

Of course, my system is flexible and you can use the book's section on rule variations to customize the system. For example, you can increase or decrease the maximum cash percentage at the portfolio level from the basic 30%. You could implement the position growth rule, or the stop loss rule, you could change the rebalance frequency, or experiment with percent triggers.

You can back-test these variations on paper with various stocks and see if they improve the system in ways that make you more comfortable.

Read More

The Return of Dividends

When I was a short term trader, dividends did not mean anything to me.

When I switched to long term trading, I not only eliminated stress and reduced expenses, but I started to enjoy seeing the dividends depositing into my account like a cash register. Cha-ching!!

Historically, dividends were a big component in the total return of stocks.

Then, in the 1990's, they became only a small component of the total return, and dividends were out of favor. We were in a raging bull market, and companies were pressured to favor growth over dividends.

Investors were hypnotized by the bubble and said: "Why should companies give out dividends (which were fully taxed) rather than invest that money in growing their market share, buying back stock, or buying the stock of other high-flying companies?"

Then, the Dot Com Crash happened, Bush cut the dividend tax in half, and investors pressured companies to pay out dividends.

Since the market has been choppy for the last decade, dividends have returned to their historical place as a big part of investors' total return.

Read More

"Stock Trading Riches" is now available in Kindle format on Amazon.com

My book "Stock Trading Riches" is now available in Kindle format on Amazon.com.

Since this is a new format, it's priced for now at $2.99.

They did a good job in the conversion - I saw that the stock tables and programming scripts display well, and the links are click-able.

You don't need to own a Kindle to buy this edition. You can download free readers for PC's, Mac's, iPads, etc.

Read More

How To Understand My Method for Trading Stocks

I made a break-through when I shifted my mind-set from digital thinking to analog.

A digital system has two values (i.e. yes or no), while an analog system has a range of values. For example, a computer memory bit can only be off or on, but your oven can be set to a range of temperatures.

Normally, we trade digitally. After we buy a stock, we either hold it or sell it. So, for the trade to make us money, we only have one chance to buy the stock correctly, and then one chance to sell it correctly.

My Stock Trading Riches system is analog. After you initially buy into each stock, fund, or ETF, the constant value rebalancing formula automatically uses feedback to adjust each position (once a year under the basic rules) - buying and selling portions of your holdings. It works like a self-correcting gyro control in a torpedo.

At the portfolio level, the system uses constant ratio rebalancing to add new positions whenever excess cash builds up.

As a result, we are never trying to predict where the market it going. We profit from volatility while having a robust portfolio that can tolerate a few companies going bankrupt. No single company puts the portfolio at risk.

Read More

Bought two small cap stocks: APKT and JOBS

On Monday, I bought two small cap stocks: ACME Packet (APKT) and 51Job (JOBS).

As I mention in the market cap section of my book, I try to balance my portfolio across market caps, since companies in the different caps have different risk / reward profiles, and the caps themselves follow different cycles.

APKT specializes in session border controllers (SBCs), which provide control and security at the edges of IP networks that carry voice, video, and multimedia traffic.

This is a fast growing company, but volatile stock with quartely fluctuations. The stock was up 104% in 2010, but I bought it now because it fell 50% after it missed it's third quarter estimate (due to a large order slipping into the fourth quarter).

I don't mind volatility, of course, since I will manage the position through my stock trading riches system.

51Job, based in Shanghai, is the human resources market leader in China. They provide recruiting, payroll processing, and training to companies across 25 cities in China. The stock fell into the $40's after a peak of $70. They have $10/share in cash. According to small cap guru Jim Oberweis, the stock trades for 15 times his 2012 earnings estimate, and has expected earnings growth of 55%.

Read More

When Buying A Stock, Invest in Management

The Oct. 10 issue of Forbes had an interview with billionaire growth fund manager Ron Baron.

He listed 4 criteria for investing in a new company. He said many others look at the first three, so the fourth one is especially important:

1. The business must have growth opportunities.

2. The business must be appropriately financed.

3. There should be a competitive advantage (i.e. barrier to others from competing with them).

4. There needs to be a trustworthy leader that inspires people to follow them - who will invest in the business, even if it hurts the short term bottom line.

The example he gave was Ralph Lauren. His European franchisee was doing poorly, and Lauren realized that Europe was the next big market. He had to pay such a high price to acquire the franchisee, that it diluted the stock. In the long run, however, the move paid off.

Read More

More Halloween Fun

Ben and Jerry's Halloween interactive website:

http://www.benjerry.com/halloween/

Read More

Happy Halloween!

I publish this link on my blogs every year at Halloween time, it's pretty cool:

http://ak.imgag.com/imgag/product/preview/flash/bws8Shell.swf?ihost=http%3A%2F%2Fak.imgag.com%2Fimgag&brandldrPath=%2Fproduct%2Ffull%2Fel%2F&cardNum=%2Fproduct%2Ffull%2Fap%2F3125133%2Fgraphic1

Read More

Learn To Relax and Not Panic In Volatile Stock Markets

In a wild, see-saw market like we've seen in the last few weeks, it is common for regular people to become worried and confused. In fact, even many professional traders are probably stressed out.

The thing is, there is never any reason to really worry - as long as you don't have to cash out the whole account in the next 5 years and you aren't trading with leverage.

Instead, there are only two things to know: stocks fluctuate, and fluctuations allow you to boost your return by buying low and selling high. When a stock you own goes down, buy some more. If a stock you own goes up, sell into the rise to generate your return.

In fact, buying into declines and selling into rises is the best way to trade - it does not require hindsight, luck, special knowledge or hours of research.

My book stock trading riches gives a complete trading system that follows this strategy. It also provides information on portfolio building, diversification, and choosing stocks and funds.

Read More

Why Do I Write About Simplicity, Zen, and Taoism on A Financial Blog?

It might seem strange that someone who likes simplicity and Eastern philosophy would write about them on a business/financial blog.

After all, doesn't business have to do with serious, bottom line math? Isn't Zen and Taoism associated with '60's style hippies and non-capitalist, non profit peace and love?

Actually, Eastern philosophy and thought is rooted in the everyday world - in mundane matters such as commerce. Eastern religions such as Buddhism do not see worship as something you only do once a week in a church or temple. Instead, you "worship" and server the Universe through your daily life and work.

Personally, I feel that any success I have achieved has been because of my passion for simplicity, minimalism, zen, and Taoism. Incorporating elements from each of them into my way of thinking was as valuable (if not more) than any computer, mathematical, or financial training I've ever had.

I've learned the power of "The Middle Way" (rather than sticking to an extreme viewpoint), analog thinking (as opposed to win/lose zero sum games), present moment awareness, the power of concentration, and "resetting" or letting go.

Read More

Gambler's Fallacy Part 1 - Casinos

The "gambler's fallacy" occurs in games of chance when a streak of one type of result happens, and the gambler then bets on the reverse. For example, supposed you were betting on coin flips and you waited until 10 heads in a row came up. You then bet on tails, because it's "due" to come up.

This is a fallacy because each flip in independent of one another. The chance of a tail coming up after 10 heads is still 50%. This same line of thinking is false in casino games such as baccarat or roulette. If a long string of black occurs, red is not more likely to come up.

Some gamblers will argue that, if there is no regression to the mean, how can the long term odds (50% in a coin toss) be so stable? In other words, say 100 tails in a row come up, how can the results regress back to 50/50 without a long streak of heads?

But you don't need a run of the other result. Suppose 100 tails in a row came up. If, as an example, the next 1000 flips alternate between head and tail, then the results become 600 tails, 500 heads. The odds have regressed toward the normal 50-50 without a corresponding run of heads.

Read More

The 401k Backlash

In the last year or so, I have seen a lot of articles bashing the 401k.

This is interesting because the 401k seemed to be sacrosanct. All through the 1990's and into the 2000's, financial planners and the financial media drilled into our heads about how important it was to save for retirement, and a 401k was great because you "paid yourself first", got the power of tax deferral and, perhaps, got a company match.

But, many 401k plans have drawbacks - the main ones being that the fund choices tend to be poor. This is because the funds don't have to sell themselves to the individual investors. Instead, they just have to sell themselves to the investors' employers.

For the employers, their money and retirement are not on the line, and administering the company's 401k plan is not a core function of the business.

Personally, I think that you should only use a 401k plan if your company matches - and then only put in enough to get the maximum match.

You are better off putting the rest of your investments into Roth IRAs and/or taxable accounts where you can get long term capital gains - which can be canceled through capital loss harvesting (which is explained on page 28 of my book Stock Trading Riches).

Read More

Steve Jobs Stepping Down From Apple - Sad End of an Era

Last week, Steve Jobs announced that he was stepping down as CEO of Apple Computer.

I felt sad when I heard the news because of his recent history of pancreatic cancer and having a liver transplant. If he stays alive, and can contribute as chairman of Apple, then it is ok. But, I'm worried that he might be terminal. I hope I'm wrong.

Apple ran into trouble after Jobs left the first time. But, because of that experience, I have heard that Jobs has gone out of his way to imprint his philosophy into the company.

I really admire Steve Jobs - he has two great qualities for success:

1. He can anticipate what people will want.

2. He practices zen minimalist design - The key isn't what the device does, it's what it doesn't do.

This last quality is especially at risk, now that Jobs has stepped down. It's hard to consistently exercise restraint, and push back on engineers, sales people, and marketers who want to cram in the latest and greatest features found in competitor's products.

Apple under Jobs didn't invent the mp3 music player or the smart phone - but they conquered these markets by concentrating on a few essential requirements and perfected them. These self-imposed limits benefited the consumer by making the devices simple and robust to operate.

Apple's products compared to the competitors' are like haiku vs. serious prose. They touch you like a light breeze and then leave you free, instead of enveloping you.

There's no straining or effort required to integrate Apple's products into your life.

Read More

Books, DVDs, Courses, and Seminars - Use Them Up Before Buying More!

Back in 2008, Marketing expert Ed Rivis had a good post about self-improvement materials. He was looking at internet marketing, but this applies to programs in other fields - including investing, sales, and self-help / motivation.

He cautions against investing in more ebooks, courses, and seminars (including his own) until you have fully studied and implemented everything you can out of your existing materials.

This is very good advice. Most people, including me (and, according to Ed, himself), have been guilty of buying an Ebook and course, but then failing to follow through. We have a lot of info on our hard drives and shelves, but have not really taken advantage of it.

It feels comfortable and safe to go from course to course. They entertain us and make us feel as if we are progressing. However, watching a succession of DVDs doesn't make you an expert house flipper. To do that, you need to stop watching, get out of your comfort zone, and actually flip a house.

Read More

"Stock Trading Riches" Chapters

Here are some of the chapter titles from my book "Stock Trading Riches":

My Simple Trading System

Optional Ideas for Customizing The System

Zen and the Art of Speculation

The Hidden Dangers of Investing Too Conservatively

7 Stock Market Secrets for New Investors

Divorce of A Trader - The Perils of Leverage

Why Stocks Are Better Than Mutual Funds

Exchange Traded Fund (ETF) Investment Success - Stick to the Basics!

Combining Fundamental and Technical Analysis for Stock Trading

How to Invest in an Era of High-Inflation and a Weak US Dollar

Deflation and Stock Picking

How Markets React to News and Reports

The Problem With Trading From Charts - The Secret Flaw Technical Analysts Never Talk About

Evaluating Trading Systems Critically - Be Wary of the Well-Placed Example

How to Select IPOs That Are Ready To Explode

Stock Market Cap Analysis - Secrets for Building a Diversified Portfolio

6 Unconventional Metrics for Stock Picking

Bonus 2009 Updates

Bonus Awk, Perl, and Excel Scripts

Read More

Don't Be Worried About The Turbulence in The Stock Market

In a wild, see-saw market like we've seen in the last few weeks, it is common for regular people to become worried and confused. In fact, even many professional traders are probably stressed out.

The thing is, there is never any reason to really worry - as long as you don't have to cash out the whole account in the next 5 years and you aren't trading with leverage.

Instead, there are only two things to know: stocks fluctuate, and fluctuations allow you to boost your return by buying low and selling high. When a stock you own goes down, buy some more. If a stock you own goes up, sell into the rise to generate your return.

In fact, buying into declines and selling into rises is the best way to trade - it does not require hindsight, luck, special knowledge or hours of research.

My book stock trading riches gives a complete trading system that follows this strategy. It also provides information on portfolio building, diversification, and choosing stocks and funds.

Read More

The Threat Right Now is Deflation - Not Inflation!

Too many people are preaching a gloom / doom scenario where the Chinese (and others) reject U.S. bonds because of the debt, we have to raise interest rates, and suffer hyperinflation.

That is just a fantasy at this point.

Since the "downgrade", investors have been piling into treasuries - S&P's view was completely rejected. U.S. bonds are still considered the safest and most liquid investment. There are no other options. Swiss bonds are considered safe, but their market is not nearly large enough.

Right now, we are more in danger of deflation than inflation. There is currently a liquidity trap. Companies are awash in money, but not spending. So there is no demand.

Proof: Bank of New York just started charging negative interest on large cash deposits. Any return the bank can get by investing its balances in overnight / short term paper can't even cover the insurance / overhead of holding deposits!

Even though everyone wants the debt burden eased and don't want any more government stimulus, that might end up being the only course of action. The Fed can't cut interest rates any further. Companies have money, but there is not enough demand for goods/services. Cutting government spending right now will reduce demand. The time to reduce the deficit by spending cuts will be after the economy recovers out of recession.

Read More

The S&P Downgrade of U.S. Debt is Over-hyped

The news media has been making a big deal about the S&P downgrade:

1. The republican candidates are trying to take advantage of it.

2. Yesterday's stock market decline was blamed on the downgrade.

3. CNN had a psychologist on about how people's esteem would be affected.

4. Someone on TV said in 20 years, we will ask "where were you when the U.S. was downgraded?"

The truth, as Paul Krugman has stated on his blog, is that a tarnished ratings firm was quick to downgrade the U.S. - possibly for political reasons, since they botched the numbers.

The downgrade isn't justified because AAA rated countries like France have more debt per GDP and, because borrowing costs are so low, the U.S, could take on another $1 trillion of debt and future debt servicing cost growth would be negligible (0.07% GDP).

On Monday, the market rejected the downgrade because treasury bonds went up. No matter what S&P says, the world knows that U.S. treasuries are the safest and most liquid investment.

Read More

Unions Alone Aren't To Blame For The Fiscal Mess of Our Cities and States

I read an article yesterday about Central Falls, Rhode Island filing for bankruptcy.

A lot of the comments were blaming the unions, and how they have unsustainable benefits and pensions.

I made a comment that the issue can't be entirely blamed on the unions:

To be fair, unions aren't the sole cause of the fiscal problems happening in our cities and states. In many cases, the contracts signed decades ago would have been affordable if the politicians had made the required contributions when they were due, so the amounts would have compounded. (For investment success, "time in the markets" is more important than "timing the markets".)

Instead, they skipped payments and used the money for other entitlements to buy votes. Then, they turned over management of the funds to the investment managers with the best political connections, and let them take investment risks to make up for the missing or late contributions. Instead, this resulted in investment losses and under-performing the markets. Anyone remember the rare coin investing fiasco from Ohio?

Here in Illinois, the lawmakers not only didn't make required contributions, but they kept changing the pension formulas - against the advice of their own actuaries. Now we have a big unfunded pension liability.

Read More

Art of the Down Sale

A few years ago, Money Ning had a good post about how restaurants and businesses try to up sell us - for example, by a waitress suggesting wine with our meal.

Back in 2008, I experienced the opposite - one of those rare cases of a down-sell!

It made me feel good!

We had domestic service with Dish Network, and my wife wanted to add an international channel.

I called up to add it, and the guy told me I had to get a second satellite dish for $56.

Somehow we got disconnected (turned out to be lucky for me) and I called back and spoke to a woman.

She told me that, instead of paying $56 for a second dish, they now have a “super dish” that can take the place of both the international and domestic dishes. I could get my domestic dish swapped for this one for free.

So, now, instead of having to pay $56 and having 2 dishes wired up together on the side of my house, I’ll pay nothing, and have only one dish to worry about!

See how powerful the down sell (suggesting ways to save your customer money) can be! Here, I now had a good experience with Dish Network and I'm telling everybody about it.

Read More

Don't Underestimate Small Flows of Passive Income

Monevator is a motivational blog for armchair investors.

It has a good article on Why a little passive income from a side project is worth a lot more than you think.

If your project "only" makes you $5 a day, that is $1,865 per year. But, at an
interest rate of 3%, this is like having more than $60,000 in the bank!

If you create a "set it and forget it" project, and it only trickles in a little bit of money, don't be discouraged. Just work on setting up more of them.

Read More

San Francisco Bridge and Outsourcing: Is 6% Worth it?

California is replacing the San Francisco - Oakland Bay Bridge. It sounds like the type of large public works project that will provide needed jobs to Americans.

However, it is keeping hundreds of Chinese workers employed. To save money, California outsourced the construction of the bridge to China. The bridge pieces will be shipped to the U.S., and assembled by Americans.

California is risking criticism in three ways:

1. They outsourced jobs.

2. If there are any problems - especially fatal accidents - they will be accused of overlooking China's reputation for poor quality and cutting corners. Not to mention the possibility of damage from overseas shipping and the need to meet strong earthquake standards.

3. According to this New York Times article, in order to not buy American, they gave up federal funds.

Were these risks worth taking? Well, according to this article, the project will cost $7.2 billion, and they expect to save $400 million from having the Chinese do so much work.

That means that the total cost to get the bridge built completely by Americans would have cost $7.6 billion. Thus, California saved about 5.5%

To me, saving only about 6% is not enough compensation for risking quality, safety, earthquake standards, and not employing Americans.

Read More

L-1 Identity Solutions (ID) - Another Real Life "Stock Trading Riches" Trade

On April 23, 2007 (my birthday by coincidence), I bought 101 shares of L-1 Identity Solutions (ID) at $19.61. L-1 makes biometric security products (retinal scanners, etc.) for government agencies, border control, courts, corporations, etc.

On July 25, ID was acquired in an all cash deal for $12/share. Thus, buy and hold yielded -39% for the last 4 years.

However, I managed the position with the Stock Trading Riches system. The formula had me do the following additional transactions:

12/29/2008 buy 230 shares at $6.04

6/4/2009 sell 107 shares at $8.91

12/22/2009 buy 89 shares at $6.40

12/28/2010 sell 145 shares at $11.90

I ended up with a +$18.6% return for 4 years. This is an annualized return of 4.4% - not bad considering that, in hindsight, I bought the stock too high.

This was another example of how my Stock Trading Riches system self-corrects your positions over time.

Read More

How The Debt Ceiling Debate Could Affect Interest Rates

At the end of the day, after they make points with their followers, I believe democrats and republicans will compromise and raise the debt ceiling.

However, all the current arguments, posturing, and waiting until the last minute has not given confidence to either consumers or the debt rating agencies.

The ratings agencies are quick to downgrade these days, because they are on the defensive about their role in the financial crisis. Critics said that they turned a blind eye to risk.

There is a chance that, even with an agreement to avoid default, at least one ratings agency may downgrade U.S. debt.

How would a downgrade affect ordinary people like you or me?

First, the interest rates that the U.S. must pay would go up. This would make interest on the national debt an even higher component of government spending. Secondly, the treasury rates are used to set all other interest rates. If the treasury rate increases, so would all mortgages, car loans, etc.

Read More

How Can Two Unrelated Businesses Cross Promote Each Other?

Internet Marketing expert James Brausch "retired" to South and Central America, but he consulted with some brick and mortar businesses there and he advised two of them - a taco restaurant and a spa - to cross promote each other.

He had the taco restaurant give out, with each purchase, a coupon good for a free 10 minute back massage. He had the spa give out to each paid customer a coupon for a free burrito.

These coupons were not announced before hand, so customers did not know that they would receive them until after purchase. By only giving out coupons to paid customers, he increased the chance that, when the customer used the free coupon, he would be more inclined to purchase from the other business.

Read More

I'm On Fox Business

I was interviewed for a personal finance article on FoxBusiness.com which featured Five Smart Money Lessons From Reality TV. They even mentioned my book "Stock Trading Riches".

They wanted financial experts to describe financial lessons that one can learn from reality TV shows. They used my example of "The Biggest Loser" - where people can learn that, like losing weight, controlling debt and making wise financial choices are skills that improve slowly and steadily. Don't get discouraged if you find it hard to make instant progress.

Read More

Trading With Charts and Technical Analysis Is A Good Way To Go Broke!

Every day, thousands of people decide that they want to "trade stocks and make millions". Unfortunately, there are no shortage of snake oil salesmen willing to encourage them, and sell books, and fancy technical indicator and charting software.

The truth is that if you approach the stock market with a small amount of capital, and expect to get rich quickly, you are setting yourself up for failure:

1. You might gamble a large percentage of your money on one or two risky trades.
2. Pay too much in expenses (commissions, fees, books, software, DVDs, seminars, etc).
3. Use technical analysis and charting.
4. Get involved in futures and options.

The stock market is a fantastic way to make your money grow and work for you, but you can't expect it to triple or quadruple a small stake. Instead, count yourself as a good trader or investor if you can reliably generate between 10 - 20% per year consistently.

Please do not buy into hype about technical analysis and charts. Now, you do need to use technical (i.e. price based) rules for deciding buy and sell points, but these are about managing risk and taking profits from positions determined through fundamental analysis. But, you need to beware of depending on charts and technical indicators to predict when stocks will go up or down.

Most of these technical indicators have been recycled and sold since the 1970's, when computers and calculators were available for the first time. "Trading gurus", who make more money from selling systems than actually trading, found they could create indicators that sometimes gave reliable signals, and then could cherry pick these examples for their sales pages.

Chart patterns and technical indicators are seductive because most people - especially successful professionals from other fields - think in an employee mentality - rather than an entrepreneurial mindset. In other words, they want a consistent paycheck and reliability. They want a boss to give them instructions. In this case, the trading guru gives them a well defined job - buy when this line crosses this, or sell if this chart pattern occurs. They don't want to think for themselves, take risks, and invent their own systems.

This is why many doctors, lawyers, and engineers make lousy traders and business owners.

I never consistently made money with traditional technical analysis. I only became consistently successful when I turned unconventional and developed my Stock Trading Riches system.

The Stock Trading Riches formula is technical, in that it works on price, and it is as easy to apply as a moving average or oscillator. But, it is not trying to predict when to buy or sell a position, or trying to predict the market. It's a tool for managing a position - lightening up when the position has increased and bulking up the position when it is down.

I found the secret to trading a stock is not to jump in and out. The key is to always hold core position and mathematically adjust the number of shares, depending on a formula.

Read More

Even Al Qaida is No Match For The Chicago Commodity Pits

The Department of Justice said that an Al Qaida operative used $27 million to trade commodities - and lost $20 million in 8 months. The DOJ filed a lawsuit to recover the money.

This was commodities trading - which makes even the riskiest stocks look like savings bonds.

Commodities fluctuate less than stocks, but commodities contracts are insanely leveraged - which means that, even if you have a winning trading strategy, you can get wiped out by random fluctuations.

For example, with as little as a $500 deposit, you can trade one corn contract. At a recent price of $6.50 1/4 per bushel, one contract has a value of $32,512.50 (6.5025*5000). That means, using the minimum margin, a 1.5% drop in price would wipe you out.

Of course, you could deposit the full amount ($32,512.50) or even the 50% margin allowed in stocks ($16,256.25) but, in practice, nobody does this because corn prices fluctuate a lot less than a stock price.

The experienced traders in Chicago know that individual traders look at charts and, due to heavy margins, have little tolerance for fluctuations against their positions. So, market makers will buy and sell large quantities to make trends choppy, causing little traders to exit at a loss.

Accounts get depleted quickly through getting "chopped" - repeatedly buying high and selling low - "Death by a thousand cuts".

I've been a full time trader, and I've been burned enough by commodities to stick with stocks, where you can get an edge. The only ones who succeed at trading commodities are insiders whose fathers and grandfathers traded in the CME and CBOT pits.

Read More

It's OK To Splurge Once In A While

I did something impulsive on Wednesday.

I took our 2002 Camry for servicing, and they gave me a 2010 rav4 (small suv) for a loaner. My son and I fell in love with it and got my wife to agree to trade the Camry for it - plus we paid maybe $12k (and an extra $1400 to upgrade to leather seats).

We have the car now, but will drop it off on Monday to get the leather seats installed (they will give us another loaner for 2 days).

This rav4 is now only the third car I've owned.

I owned my Celica for 19 years (1990-2009), so part of me feels like I'm wasting money changing the Camry when it's only 9 years old.

But, I justify the purchase for two reasons:

1. We are pretty frugal in general.

2. Life isn't always about saving money. Sometimes, it is nice to actually spend and enjoy your hard-earned money. I feel good when I drive my new car, and enjoy looking at it.

Read More

Who Is To Blame For The United State's High Level of National Debt?

There is plenty of blame to go around for our present debt situation:

1. Under Bush, we cut taxes and started 2 wars - and Obama continued this while
adding another 1/2 war (air strikes on Libya). During WWII, the folks at home made sacrifices, such as rationing, etc. that made them feel connected to the war effort. While we no longer need rationing, we should have ended the tax breaks after 911 - when we went to war.

2. The bottom line cause of the financial crisis was Greenspan pumping too much money trying to lessen the effects of the dot com crash. Booms and busts are a natural cycle in capitalism, and we keep trying to use the government to smooth out the down cycles.

3. Finally, we have had historically low interest rates for the last few years. While responsible homeowners locked in low, fixed rate 30 year mortgages, the government is still mostly stuck with short term debt. We should have been issuing less short term bonds and lots of 20, 30, and even 50 year bonds.

Read More

Learning About Business by Surfing Around

Sometimes it's fun to explore the internet without any plans - just following links and "googling" interesting phrases.

This morning, I started off reading an article about an American sumo wrestler who set a world record for heaviest finisher of a marathon.

One of the comments was a joke that the sumo guy would cause a shortage in Gold Bond medical powder - in other words, a joke about chafing.

I remember hearing commercials for Gold Bond years ago so, feeling nostalgic, I googled it and went to the Wikipedia site.

From there, I learned that a lot of cool products from the past - like Gold Bond, Icy Hot, Selsun Blue, etc. are made in Chattanooga Tennessee by Chattem, a 100 year old company.

The Chattem Wikipedia entry mentioned that they are a subsidiary of French drugmaker Sanofi-Aventis, which sounds very interesting. An old time Chattanooga company owned by a French drugmaker.

It makes me think of the "Beverly Hillbillies"'s Jed Clampett mingling with a French aristocrat. So, I googled the merger.

Turns out that Sanofi bought Chattem in 2009 on December 21 (my brother's birthday). They paid $1.9 billion - offering $93.50/share, which was a 34% premium over the closing price.

From an analysis point of view, it looks like it was a good deal. Chattem is in the top 10 for consumer products in the U.S. (and has a higher profit margin than leaders Johnson & Johnson and Proctor & Gamble), but they don't have much market overseas. Sanofi is losing patent protection from many drugs, and wants the stable earnings from consumer products to make up the lost income. Also, they want a sales network to sell an over-the-counter version of Allegra in the U.S.

So, it was a win-win deal for everyone.

Finally, I saw an interesting article on the Wall Street Journal that 2 French businessmen in Brussels got charged by the SEC for insider trading on the Sanofi-Chattem deal. They found out about the deal before hand, bought options (expiring on Jan 15) on Chattem stock, and sold the options right after the merger was announced for a $4.2 million profit.

So I had a fun and educational "surf session" all because of a Sumo running (actually walking) a marathon :-)

Read More

"22,000 Tears" Visa Blunder - Should the U.S. Give Visas Through A Diversity Lottery?

Today, Yahoo had an article about how this year's diversity lottery experienced a computer glitch and awarded 90% of the first 22,000 (out of 50,000 openings) to people who applied in the first couple of days.

These people were elated that they won, and then crushed when the State Department said they will re-run the lottery. Immigration lawyers say they should honor these 22,000 results and randomly award the remaining openings from people who applied later.

I think that, since the government messed up, they should let these 22,000 people have their visas, remove their names from the pool, and re-run the lottery fairly (picking a new 50,000 from the left over pool).

But, like usual, I find the comments on Yahoo to be just as interesting as the articles. In this case, a lot of people think the whole idea of a random lottery to be dumb.

I actually like it and posted my own comment defending it:

Immigration to the United States has been a big factor in us being the world's only super power. In fact, there are some who argue that, going forward, our biggest competitive advantage against China and India is that we welcome immigrants and new ideas.

I think the Visa lottery is a good idea because:

1. It involves a relatively small amount of visas compared to those given out by other programs, that target skilled and/or wealthy immigrants.

2. The visas from those programs end up going to immigrants from just a handful of countries.

In other word, you can't centrally plan creativity and innovation. I think we are richer if we give artists, poets, dreamers, etc. from other countries a shot at 5% of the visas, rather than letting them all go to high tech companies bringing in computer workers and engineers from India, China, etc.

From my comment, please don't get the idea that I don't like computer consultants from India. My point is that they are well-represented. But, it is in the best interests of the U.S. to distribute a small percentage of visas randomly to people from countries that are under-represented from other visa programs, to diversify the pool.

This way, we increase our chances for allowing in someone who ends up contributing to our society, but would never have had a chance competing against skilled workers.

Read More

Dog Blown Away By Tornado Makes It Back Home

They found the dog on the front porch after 2 ½ weeks – he crawled back on 2 broken legs:   http://news.yahoo.com/s/yblog_thelookout/20110526/us_yblog_thelookout/dog-with-two-broken-legs-finds-owner-after-storm

Read More

Clever Examples of Long Term Strategy To Doing Business With China and Asia

I read a recent article in Forbes about Peabody Energy. In 2003, when he became COO, Greg Boyce foresaw that China, with it's incredible growth rate, would switch from being a net exporter to a net importer of coal.

When he became CEO in 2005, he spun off the company's Appalachian mines and invested in Australian coal mines so he could sell to China. Since he has been CEO, the shares are up 10 fold and non-U.S. operations now provide 50% of Peabody's earnings (up from 2%).

The Forbes article mentioned 2 of Boyce's actions that really impressed me as clever, and long term strategic:

1. Before China became a net importer of coal, he laid the groundwork by opening a Beijing office and a trading desk, so he could build trust and relations.

Also, as I previously mentioned, he invested in Australian mines because Australia has more coal than they need domestically, and are close to Asia. He purposely invested in Australian mines that had access to ports, so he could keep logistic costs down.

2. The next big thing is Mongolia. In the Gobi Desert, they have the world's largest untapped deposits of metallurgical coal (better quality then the subbituminous coal found in the U.S.), and are starting to shop around development rights. Besides Peabody, lots of American, Chinese, European, and Russian companies are vying to develop these fields.

To position themselves for this opportunity, Peabody wants to have a local staff of experienced managers. So, today, they are investing in Mongolia by hiring Mongolian engineers to work in their Wyoming coal mines, and are sending Mongolian students to U.S. engineering schools.

Read More

Leave Ronald McDonald Alone!

A lot of healthy eating activists are taking aim at McDonalds and asking them to retire Ronald McDonald. They think he unfairly advertises to children.

The truth is that these activists will always go after McDonalds about something. If Ronald goes away, they will target happy meals next. They just don't like McDonalds.

But McDonalds is a successful business that makes lots of money for its shareholders by giving people what they want. Who are a few activists to tell millions of Americans that you can't be trusted to pick your own restaurant, so we'll go after McDonalds to protect you?

When San Francisco banned Happy Meal toys, my wife thought that's a good thing, because my son always wants Happy Meals, and sometimes I give in. But I told her that is completely wrong. I am the parent - it is my issue if I give in to my son. Parents should not be hiding behind the government because they can't say no to their children.

Having a few "experts" deciding which business are worthy sounds like Communism and central planning. It's doomed to fail (while capitalism is very robust and adaptable) because millions of "average" minds are collectively better at determining markets than a "smart" few.

Read More

Are We Headed For Runaway Inflation? Myths vs. Realities

It's fashionable today to talk about the high prices of gold and oil, and how the Fed is printing so much money that we are going to have hyperinflation.

I'm skeptical, and columnist Steve Chapman, a member of the Tribune's editorial board, agrees with me. He laid out a compelling argument in a recent Chicago Tribune article - which I have paraphrased in the form of Myth vs. Reality:

Myth: The price of gold has doubled since Obama was elected, because investors want to hedge against an increasingly worthless dollar.

Reality: Gold has been in a long-term bull market - during the 8 years of the Bush Administration, the price of gold tripled while the consumer price index rose less than 3% per year.

Myth: The rise in oil and other commodities are caused by the Fed's actions.

Reality: Commodity prices are also affected by events outside the United States - in this case, strong demand from developing countries such as China.

Myth: The government understates inflation because the "core" inflation rate excludes food and energy.

Reality: Food and energy are excluded because they give a distorted picture due to volatility. The core rate is accurate. During the last decade, the core rate was up 21%, vs. 27% for the full inflation rate. General inflation can't exist without the core rate increasing. In the 1970's everything went up - not just food and energy.

The bottom line is that there is no evidence of near-term inflation. The market knows this, as indicated by the popularity of three year treasuries yielding 1%. They would not be in demand if people thought inflation would ravage it.

Finally, high inflation like the 1970's needed a wage-spiral. Higher prices resulted in higher wages, which resulted in higher costs. Today, there is no wage-spiral. Unemployment is high, and wages / salaries are stagnant.

Read More

I Bought Two REITS Today - AAT and CPT

Today, I bought two REITs (Real Estate Investment Trusts).

REITs trade like stocks, and can be thought of as real estate mutual funds. In other words, instead of owning companies, they own real estate. They get special tax breaks, providing that they pass most of their earnings to shareholders. Because of this, REITs provide a lot of income.

I have always wanted to buy some REITs to diversify my portfolio, and I decided now might be a good time after reading an article in the recent edition of Forbes entitled "REIT Merger Boom is Brewing".

I bought two REITS: American Assets Trust (AAT) at $21.88 and Camden Property Trust (CPT) at $62.51.

AAT went public in January at $20.50 per share. It is a 45 year old company based in San Diego that owns a high-quality portfolio of office, residential, and retail properties on the West Coast - including California, Hawaii, and Portland OR. While the national vacancy rate is in double digits, AAT's properties in California and Hawaii are just 5% vacant.

Camden Property Trust specializes in apartment communities, is considered a buy because its stock price hasn't gained as much as bigger apartment REITs, such as Equity Residential. In fact, CPT makes an attractive takeover target for bigger REITS (like Equity) because of its large holdings in the Southwest and Southeast.

As all my positions, I plan to manage them with my Stock Trading Riches system.

Read More

Are Big Institutional Purchases A Bullish Sign?

A friend of mine recently sent me a newsletter where the writer was bullish on gold and mentioned that the University of Texas announced that they now hold $1 billion of gold bars.

I responded that this is not necessarily a bullish sign. This is an old trick that traders use to get out profitably from large positions.

It might be the case that, having accumulated this large gold position, the university is sitting on a profit.

With a large position, they will need liquidity in the form of buyers if they want to sell some or all of the position without driving down prices.

So, now they announce the purchase to encourage people to jump in to the market, and their brokers will sell their gold to them :-)

Read More

Skype: Great Trade for Marc Andreesen

This past week, Microsoft bought the internet phone company Skype for $8.5 billion. Did they overpay? Was it a good buy?

That remains to be seen. Skype continually loses money and Ebay gave up on integrating it. But, I think they may have some success if they combine Skype with Xbox and, especially, Communicator.

Many corporations (including the bank I work for) use Microsoft Communicator internally for chats. If Microsoft embeds Skype into Communicator, they could capture a big share of the voice business.

But, one thing for sure is that a big winner is Marc Andreesen (founder of Netscape) and his investment firm, Andreesen Horowitz.

Ebay bought Skype for $3.1 billion in 2005 and sold it to a group of investment firms (headed by Silver Lake and Andreesen Horowitz) for $2.8 billion in 2009.

Now, 18 months later, they sold it to Microsoft for $8.5 billion.

That's a great trade - a 204% return in a year and a half!

Read More

Recession Humor

The Recession has hit everybody..... I got a pre-declined credit card in the mail. CEOs are now playing miniature golf. Exxon-Mobil laid off 25 of its congressmen. I saw a Mormon polygamist with only one wife. If the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them. Angelina Jolie adopted a child from America. Parents in Beverly Hills fired their nannies and learned their children's names. A picture is now only worth 200 words. The Treasure Island casino in Las Vegas is now managed by Somali pirates. Congress says they are looking into this Bernard Madoff scandal. Oh great! The guy who made $50 billion disappear is being investigated by the people who made $1.5 trillion disappear! And, finally... I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds, etc., I called the Suicide Hotline. I got a call center in Pakistan , and when I told them I was suicidal, they got all excited and asked if I could drive a truck.

Read More

Will The Dollar Collapse?

A friend of mine who lives in Zurich sent me this article and asked about my opinion of this gloomy scenario:

http://www.swissinfo.ch/eng/business/Dollar_faces_collapse.html?cid=30012940

Here is my response:

I don’t think the dollar will collapse or stop becoming the reserve currency.

It isn’t unprecedented for a first world country to have such a high level of debt during time of war, or when preventing a depression / severe recession. The U.S. is doing both.

Under these conditions, there has never been a default as long as:

1. the currency is not backed by gold,

2) a lot of the debt is held outside the country.

Also, a bubble occurs when most people think there is no problem. Right now, everyone worries that the U.S. has a debt problem – including the government. That is a bullish sign. So, I think that the debt will be eased off. Eventually the dollar will strengthen.

Read More

My Book "Sudoku Fun: Volume 2" Reached #76 on Amazon.com's Bestseller List for Sudoku Books

My second Sudoku book, "Sudoku Fun: Volume 2" reached #76 on Amazon.com's Bestseller List for the category "Entertainment->Puzzles & Games->Sudoku".

Read More

I Bought Colgate-Palmolive and Cirrus Logic

On Thursday, I bought Colgate-Palmolive (CL) at $80.70 and Cirrus Logic (CRUS) at $16.49.

Colgate-Palmolive was recently mentioned in an article on how, paradoxically, the lowest volatility stocks actually have the highest total returns over time. Over the last 20 years, CL had a beta of 0.6 (the general market is 1, so anything below 1 is less volatile) and a total annualized return of 13.5% (vs. 8.8% for the S&P 500).

Around the time of this article, CL was also a recent pick of columnist Ken Fisher. He admits that many see it as a boring stock, but he sees it "as a low-risk, big-cap growth stock". At $78, he said it was trading at 16 times his estimate of 2011 earnings, and thinks it will trade at a 25% premium over the market as the economic cycle picks up.

Cirrus Logic is a way to bet on Apple without paying the premium. CRUS makes the chips for iPads and iPhones. Asset Manager Jim Oberweis anticipates revenue growth of 70% over the next 12 months.

Remember that I don't do short term trading. I try to buy good long term stocks at good prices, and then let the stock trading riches system manage the picks.

Read More

$1500 Gold and $45 Silver! The Difference Between Just Making A Prediction and Profiting From It

"$1500 Gold and $45 Silver!" was the title of an email that a friend of mine sent me a couple of days ago. His email reminded me that he had predicted these prices last year.

So, I wrote him back and said:

Hopefully you were able to profit from your prediction - and have a plan for when to take profits.

Those two things separate an economist from a trader :-)

Well, it turned out that he had taken profits along the way, and saved them to reinvest in pullbacks. I told him that he could also have used my stock trading riches system. It would actually work for more than just stocks, ETFs, or mutual funds. You could use it to trade actual metals, commodities, or currencies. In fact, just about any good.

As an example, you could take $10,000 and buy $7,000 worth of gold (or silver, or oil, or tea) and keep $3,000 in a cash reserve. Once a year, if the value of the commodity has fluctuated by at least 10%, you could rebalance. Of course, the total amount, constant value, and reserve amount can be anything you want.

With a commodity, instead of strictly rebalancing, you may want to use the optional growth rule from my book. This way, the constant value would grow over time as your position went up.

Read More

In Defense of House Flippers / Investors Buying Foreclosures

This past Sunday's Chicago Tribune "Money and Real Estate" section had an article on how house flippers have changed tactics.

During the bubble, they loaded up on easy credit, bought at high prices, did complete renovations, and carried the properties for a few months before trying to sell at higher prices.

Now, house flippers try to acquire homes cheaply - frequently from foreclosure auctions, use cash, make minor changes (such as painting or landscaping), and try to sell the properties quickly. The idea is they make less per property, but flip more per year.

Some of the flippers interviewed must have felt that people will think they are profiting by taking advantage of people losing their homes, so they offered a good defense of what they are doing.

I think this description also describes the value that stock market speculators create:

"Some people's bad fortune is other people's opportunity. I know it sounds callous...but I also feel like we provide a backstop to the market."

"Anyone who depletes the foreclosure inventory is helping the marketplace because we will not see appreciation or increases in value until foreclosures go away."

Read More

Unix / Linux Scripts For Computing Compund Interest

On my unix blog, I posted three scripts for calculating compound interest.

They are written in awk, which is included free on all unix and linux systems. Since Macs are unix-based, it should be included on them , as well. Versions of awk are also available for free download on PCs.

The three scripts are called "compound", "compound_add", and "compound_add2".

Here are some examples of how to use these scripts:

1. You open a money market account with $5,000 and earn 0.45% / month. How much is the account worth after 1 year? You would use "compound 5000 .45 12"

2. You open a money market account with $200, contribute $200 each month, and earn 0.45% / month. How much is the account worth after 1 year? You would use "compound_add 200 .45 12"

3. You have an existing money market account with $5,000. You now contribute $200 each month and earn 0.45% / month. How much is the account worth after 1 year? You would use "compound_add2 5000 200 .45 12"

Read More

Grant Achatz's Next and Doughnut Vault: How To Succeed In Business By Playing Hard To Get?

I was reading in the Chicago Tribune about two new restaurants that are thriving despite (or maybe because) they make it hard to buy their food:

1. In order to make a reservation at "Next", you have to buy a non-refundable ticket from their website. There are 14,000 names on the email waiting list, so tickets are going for up to $600 on Craigslist. Remember, this is just to get in - the actual dinner cost is separate.

2. Even more intriguing, a small doughnut shop called "Doughnut Vault" (just a order/pickup window in an alley) opened in Chicago's River North area without much publicity, and they sell only coffee, and 5 kinds of expensive ($2 - $3 each) doughnuts.

But the lines are jammed every morning. People start lining up by 7:30 am, but the shop has no set hours. They could open at 8 am or 9 am. They send out a Twitter just before opening time. Once open, they sell out fast, because they only make so many.

The Tribune interviewed one woman who lined up for hours twice, and didn't get any doughnuts.

With "Next", it is a bit understandable, because the chef / owner is Grant Achatz - who is a celebrity chef. His "Alinea" restaurant has three Michelin stars and is considered the best restaurant in the United States. He even gets his $100,000 Viking ovens almost for free, in exchange for them to mention his name in their marketing materials.

"Doughnut Vault" is owned by Brendan Sodikoff, a veteran of famous restaurants like Alan Ducasse, who also owns Gilt Bar and Maude's Liquor Bar. But, this fact isn't advertised. In fact, there wasn't much publicity or advertising.

What are the business lessons in this?

1. People are attracted and interested in the mysterious and exclusive.

2. Being hard to attain is not the same as anti-customer service or substandard products. People rave about the food quality at both places. Sodikoff told the Tribune that he doesn't like making people wait, and he makes up to 600 doughnuts a day.

3. Restaurants and food tend to be fads. Especially with "Doughnut Vault", it is possible that there will be no wait in 6 months, or it might even have closed down.

Read More

Develop A System Before Trading

When I was first starting out as a trader, I sometimes traded impulsively - where I tried to use my "gut feel" to execute buys and sells. What happened every time was that I lost money and got stressed.

This also includes jumping in and buying a stock because of a hot tip or because you like the product. Now, don't get me wrong - I do buy stocks based on analyst recommendations or because I like to shop there. But, I follow my Stock Trading Riches system so that I know at which prices I will buy and sell, and at what quantities. So, I am never trading impulsively.

No matter what happens to the stock, I can fight the emotions of fear and greed because I have an objective way to calculate my buy and sell points.

I'm not saying that everyone should use the Stock Trading Riches system - because different systems appeal to different personalities. Even if system A is better than system B, you would be better off using system B if it appeals better to your investing philosophy.

But, the key is that you do need a system.

Read More

Interesting Article on Walter Breuning, The World's Oldest Man

Walter Breuning, the world's oldest man, died Thursday at age 114. The Associated Press article on his death included his story - based on an interview they did with him last October.  It's very interesting reading, because they framed his story in parallel with the history of the U.S. Some highlights: 0. His mother died at 46, and his father at 50, so he didn't have longevity in the family.  His advice for living a long life:       a) Embrace change.       b) Eat only 2 meals a day.       c) Work as long as you can.      d) Help others.     e) Accept death. 1. His earliest memory is at 3 - with his grandfather horrifying him by telling stories of killing Southerners during the Civil War. 2. In 1912, his parents split up and he had to work on the railroad at 16.  He ended up working there for the next 50 years.  3. His mother died at 46 and his father at 50. 4. In 1919, he bought his first car, and said it spooked the horses that he had to share the street with. 5. He got married in 1922, and bought vacant land for $15.  The Depression hit and he was never able to build a house.  Eventually he sold the land for $25, making a $10 profit. He never bought property again and was a lifetime renter. 6. His wife died in 1957 - they had no children, and he never remarried.

Read More

Gadhafi's Surprising.ly Internet Asset

In an ironic twist, it turns out that, whenever NATO, the U.S. Air Force, celebrities like Charlie Sheen, or just regular people, have been sending out links to their Twitter followers, they have been using a Libyan asset.

Many of the most popular free services for condensing links, such as bit.ly or owl.ly, are using domains owned by Libya.

Here is a link to the Wall Street Journal article about it:

http://finance.yahoo.com/banking-budgeting/article/112508/gadhafi-ly-web-suffix-libya-wsj

Read More

Like Enlightenment, Winning Trades Are An Accident

One of my favorite quotes that I share on my Tao of Simplicity blog is:

A zen master was once quoted:

Enlightenment is an accident, but some activities make you accident prone.

Yesterday, I read a blog post by trader Rob Michell, who said something similar about winning trades:

"It is impossible to distinguish between luck and skill in most cases."

"Having said that, here is another tidbit of crazy inside knowledge. Since you cannot distinguish between luck and skill a good portion of the time, the real truth of the matter is you are not responsible for your winning at all. The market is."

"I said before, you have to manage your risk and then, at some point (and here is the blaspemous statement that will make most traders cringe), a good accident happens. Accident you say?? Yes. I use that word, because it is the only one that is strong enough to remind me there is nothing personal about trading. It is all management of risk. It is a disipline."

I really like this fresh way of saying a trading truth, which is that the market goes where it goes, and nobody can predict it 100%. No strategy or model can always pick the best times to buy and sell.

We have to think like a casino. We want to take bets where we have an edge. On any individual trade, it is an accident if we make a profit. But, if we have a trading system with an edge, it won't be an accident if we profit over time.

Read More

Topics Covered in "Stock Trading Riches" Book

Here are some of the topics covered in "Stock Trading Riches":

My Simple Trading System

Optional Ideas for Customizing The System

Zen and the Art of Speculation

The Hidden Dangers of Investing Too Conservatively

7 Stock Market Secrets for New Investors

Divorce of A Trader - The Perils of Leverage

Why Stocks Are Better Than Mutual Funds

Exchange Traded Fund (ETF) Investment Success - Stick to the Basics!

Combining Fundamental and Technical Analysis for Stock Trading

How to Invest in an Era of High-Inflation and a Weak US Dollar

Deflation and Stock Picking

How Markets React to News and Reports

The Problem With Trading From Charts - The Secret Flaw Technical Analysts Never Talk About

Evaluating Trading Systems Critically - Be Wary of the Well-Placed Example

How to Select IPOs That Are Ready To Explode

Stock Market Cap Analysis - Secrets for Building a Diversified Portfolio

6 Unconventional Metrics for Stock Picking

Bonus 2009 Updates

Bonus Awk, Perl, and Excel Scripts

Read More

How to Become A Billionaire

Rich Karlgaard, publisher of Forbes Magazine wrote an essay in the latest billionaire's edition about How to Become A Billionaire - Zero by Zero.

He starts with what he thinks people mean by "millionaire" today - an 8 figure net worth ($10 - 99 million). He thinks that there are hundreds of these in every big city in America - either CEO's or people with their own successful businesses. Alternatively, you can become a partner at a top law firm or investment bank - if you have the right credentials.

To get to the next step, 9 figures ($100 - 999 million), he thinks you need to create "a company beloved by the capital markets", and then sell it through an IPO or to another company.

To take the final step, and become a billionaire, requires you to build a company that follows a Moore's Law curve (doubling every year) and scale it up globally.

Read More

Using A Stop Loss With The Stock Trading Riches System

The Stock Trading Riches system is designed to take advantage of stocks that are down in price. Falling prices are our friend. That is why the basic system does not use a stop loss.

I think the system has enough of a safety net because we buy low, take profits, diversify, and can always replace stocks that are no longer fundamentally sound.

However, in my book, I have an optional stop loss rule because there are many people who feel uncomfortable buying a stock that is down.

I think a fundamental stop is much more valuable than a strict mechanical stop. Before you rebalance stocks that are down, take time to read up on them, to see if there are fundamental reasons you don't want to continue to own the stocks.

For example, I had 2 deep divers for many years - Lucent and Nortel. Over three years, I only had buys, no sells, on them.

When I went to rebalance them at the end of 2008, I searched for info on them. I read lots of talk about Nortel filing for bankruptcy and whether the Canadian government would prevent it.

So, I ended up keeping Lucent and replacing Nortel. Lucent has since came back, while Nortel did go bankrupt.

Read More

Every "Stock Trading Riches" Position is Ultimately Self-Correcting

I'm always amazed and excited when I think about how much my Stock Trading Riches system adjusts and self-corrects itself to actual market conditions.

Not only does each stock's average purchase price get adjusted through rebalancing, but even the stock itself is correctable. If you find fundamental reasons to no longer own a stock, its position can be easily switched over to another stock through rebalancing.

This is because the rebalancing formula is pure mathematics - it doesn't care if you plug in stock X or Y.

For example, suppose you were maintaining a constant value of $5,000 in Walmart and, after a particular year, your position was down to $3,000. Normally, you would buy $2,000 of Walmart.

However, if you lost faith in Walmart (for example, heard it might go bankrupt), you could choose another stock - say Target (it doesn't have to be in the same industry), sell all $3000 of Walmart, and buy $5,000 of Target.

You would then have a capital loss, and could say that Walmart was a failed investment. But, that is only if you viewed the position as a "Walmart position".

If, on the other hand, you took the view that it was a "$5,000 slot", and Walmart happened to occupy it for a while, and now Target occupies it, then ultimately it is not a failed investment.

In fact, if any given position can always systematically buy low and sell high serially across different stocks, then you can't really have a losing position in the long run.

At the high level, the "Stock Trading Riches" system is about splitting your portfolio up into constant dollar slots in which stocks are rebalanced to capture dividends and capital fluctuations. The slot can outlive any particular stock.

Read More

Effect of Japanese Earthquake on U.S. stocks

I hesitated to write a post on how the Japanese earthquake / tsunami affected the stock market, because it is so trivial compared to the loss of life and struggle of the survivors.

When I think of the disaster, the first things that pop into my mind are the tragic deaths, admirable way the Japanese people are coping with quiet dignity, and the heroism of the engineers / operators risking radiation exposure to bring the nuclear reactors back under control.

As for stocks: Japanese insurance, finance, and manufacturing companies went down, while American construction companies like Fluor (FLR) went up because they may get a lot of business in rebuilding Japan.

Oil showed its price volatility by defying initial expectations. Oil prices had gone up because of the unrest in Libya and other MidEast nations, and it was expected that oil prices would go up more because Japan would have to buy more oil on the open market - because of damaged refineries and the nuclear plants.

The Japanese crisis may drive up oil prices before its all over but, in the short run, the price of oil actually dropped because speculators figured Japan (the world's third largest economy) would slow down and actually cause less demand for oil.

Read More

Family Finance Carnival

The Family Finance Carnival is a great source of personal finance articles.

Read More

Tax Carnival #82

The 82nd edition of the Tax Carnival is up with a lot of interesting tax-related articles.

Read More

Totally Money Blog Carnival

The President's Day edition of the Totally Money Blog Carnival is up at Fat Guy - Skinny Wallet.

This edition of the carnival is full of financial articles.

Read More

Carnival of Credit Score and Debt

The latest edition of the Carnival of Credit Score and Debt is up at Money Q & A.

This carnival has a lot of interesting articles.

Read More

Keep Investing Simple, Simple, Simple

I've been reading three interesting books on the demise of the Wall Street firms of Bear Stearns and Lehman Brothers.

I'll review the books more specifically in separate posts, but I'm motivated to point out that the biggest folly of these firms was to over-complicate investing and trading.

For example, one of the final straws for Bear was having to bail out its own sub-prime hedge funds. These hedge funds blew out because they loaded up (with leverage) on complex, illiquid products derived from mortgages. They used the products as collateral to borrow money from banks so they could keep buying.

Even with this use of leverage and sophisticated products, they were making 9 and 10% returns at the time I was making 12, 15, and 22% returns using my Stock Trading Riches system.

I was doing better than them, and I was using plain old liquid stocks and no leverage. They are using crazy securities invented by "rocket scientists"and using 40 to 1 leverage!

It goes to show that you should never underestimate simplicity.

Read More

I Bought TSU and TKR - "A Tale of Two Tims"

Based on analysis by Ken Fisher in Forbes Magazine and my own online research, I bought Tim Holding (TSU) and Timken (TKR) this morning.

Tim Holding (TSU) - is Brazil's third largest cellular carrier (with 190 million customers), but has the highest revenue per customer. It is the leading seller of iPhones in Brazil. It had a rough couple of years, but the Brazilian economy is recovering, and Tim is in a good position for growth. It is selling around one time revenue and 16 times Fisher's 2011 earnings estimate.

Timken (TKR) - is an old cyclical favorite of Fisher's. It's an Ohio-based manufacturer of anti-friction and power-transmission components, bearings, specialty steel, seals, and lubricants. According to Fisher, it's products "are basic to any economic expansion and will be throughout this one. Every downturn it gets crunched. In every expansion, it is underestimated. It should be no different this time given that 60% of its sales still come from the U.S.". It currently sells for 13 times Fisher's estimate of 2011 earnings.

Like all my holdings, now that I bought them, I will use the Stock Trading Riches (STR) system to manage the positions.

Read More

I'm Included in a Wall Street Journal MarketWatch Article on Bloggers

http://www.marketwatch.com/story/blogging-all-the-way-to-the-bank-2011-01-12

Read More

I'm Included in a Wall Street Journal MarketWatch Article on Bloggers

http://www.marketwatch.com/story/blogging-all-the-way-to-the-bank-2011-01-12

Read More

Business Lessons From Baskin-Robbins

Here is a reprint of a post I originally did in May 2008 - when Irvine Robbins, co-founder of Baskin-Robbins, died at age 90. It lists business lessons, Baskin-Robbins style:

1. Get publicity by piggybacking on important events.  Baskin-Robbins created short lived flavors like Lunar Cheesecake for the moon landings and Valley Forge Fudge for the 1976 bicentennial.

2. Be ready to improvise. When the Beatles came to the United States in 1964, a reporter called to ask whether Baskin-Robbins was going to commemorate the event with a new flavor.  Robbins didn't have a flavor planned but quickly replied, "Uh, Beatle Nut, of course."  The flavor was created, manufactured and delivered in just five days.

3. Don't let egos get in the way of partnerships.  When he partnered with his brother-in-law, the late Burton Baskin, Robbins recalled they used a flip of the coin to decide which name came first.

4. Don't be afraid to try new concepts.  Baskin-Robbins decided to sell their stores to managers, pioneering the franchise concept for ice cream stores.

5. Treat your employees well.  As corporate policy, employees were allowed to eat all the ice cream they wanted, because, Robbins said, "I don't want my employees stealing."

6. Focus on quality metrics. Robbins was dedicated to upholding the quality of his ice cream regardless of the cost, his daughter said.

Read More

Always Trade With A System

When I was first starting out as a trader, I sometimes traded impulsively - where I tried to use my "gut feel" to execute buys and sells. What happened every time was that I lost money and got stressed.

This also includes jumping in and buying a stock because of a hot tip or because you like the product. Now, don't get me wrong - I do buy stocks based on analyst recommendations or because I like to shop there. But, I follow my Stock Trading Riches system so that I know at which prices I will buy and sell, and at what quantities. So, I am never trading impulsively.

No matter what happens to the stock, I can fight the emotions of fear and greed because I have an objective way to calculate my buy and sell points.

I'm not saying that everyone should use the Stock Trading Riches system - because different systems appeal to different personalities. Even if system A is better than system B, you would be better off using system B if it appeals better to your investing philosophy.

But, the key is that you do need a system.

Read More

The six year return on my Stock Trading Riches System

While I'm happy that I beat the market in 2010, what I'm really proud of is that I have exclusively used the Stock Trading Riches system on my portfolio for the last 6 years, and I have beaten the S&P 500 over those 6 years:

Year, Me, S&P 500

2005, +13%, +4.91%

2006, +14%, +15.79%

2007, +22%, +5.49%

2008, -40%, -38.49%

2009, +44%, +23.5%

2010, +22%, +13%

My portfolio had a cumulative six-year return of +65.66% vs. +10% for the S&P500.

Read More