Diversification improves your performance in the long run and reduces risk all the time.
Diversification includes other asset class besides stocks like oil, gold, cash (yes even cash for better opportunities), real estate... However, stock historically produces the best return.
When an asset is over-valued, it will return to the average historical value with one or two exceptions. Gold is one exception, but it is due to the USD depreciating.
Simply put, owning 10-15 good stocks with less than 2-3 stocks in same sector (which have to be good sectors) achieves diversification goals for most.
However, every one's situation is different:
* Depends on your wealth and your age.
For younger folks with limited wealth (less than $50,000 to invest), a portfolio of 3 stocks (preferably in ETFs) in different sectors could be enough.
For retirees, you may want to have a larger percentage in cash and bond. However, if you're wealthy enough, you can have 100% in stocks as your living standard will not change if you lose 50% of your portfolio. Most rich folks prefer to invest in stocks besides their own businesses as their reward/risk ratios are higher even they are more volatile. Cash is safe but it loses to inflation.
If you have a billion dollars like most mutual funds, owning 10 stocks with 100 millions each is just too risky.
* Excessive frequency in re-balancing your portfolio takes up time from evaluating stocks. It may cost you in transaction fees but they are low in most brokerage accounts today. It may have some tax consequences. The advantage of turning over the portfolio (not excessively) is improving its quality with most updated info.
Your broker statements/summaries may display your current diversification. If not, you need a simple spreadsheet on what sector/asset classes your investments are in.
* Diversification can easily be achieved by buying indexed funds and/or ETFs esp. for smaller accounts and they are less volatile.
---
Personal experience.
In 2007-8, I had over 10% return while most other were losing. The reason is my concentration in energy stocks. When oil price dropped from $130 to $32, I lost big. Under diversification caused me false sign of success and led to big loses.
---
More readings.
Professor Swensen.
(c) TonyP4 2011. Written in 9/3/11. Updated 9/3/11.
#####
Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
Thursday, September 1, 2011
A double standard at least
I read some comments from Netflix on China Heat, a Chinese movie made in HK 10 or so years ago. Some comments showed the the ugliness of the American public, ignorance, or at least a double standard. It is one of the many examples and comments reflect the general opinion of a country. Here are some:
* Why all Americans in the movie speak Chinese?
Do you think all the ancient Egyptians, Roman, Greeks in Hollywood movies can speak English?
* It is just a low-budget movie.
To me, especially 10 years ago, the budget is quite high compared to the average budget of movies made in Hong Kong at that time. How many foreign countries make movies in US and hire so many union workers?
* I gave up the movie when they shot subjects 20 yards away with a pistol.
Do you believe Superman can fly?
* Why all Americans in the movie speak Chinese?
Do you think all the ancient Egyptians, Roman, Greeks in Hollywood movies can speak English?
* It is just a low-budget movie.
To me, especially 10 years ago, the budget is quite high compared to the average budget of movies made in Hong Kong at that time. How many foreign countries make movies in US and hire so many union workers?
* I gave up the movie when they shot subjects 20 yards away with a pistol.
Do you believe Superman can fly?
Tuesday, August 30, 2011
Martin Luther King Memorial
It always has controversy in DC’s memorial monuments. The last one is Maya Lin’s Vietnam Memorial. Now, even the critics at the time admit it is one of the greatest memorial monuments ever if not the greatest. Every day, it has touched many and moved them to tears.
The concept of touching the sky and the land is most likely a Chinese concept and most likely an idea from her parents. The simple concept of including the names of the fallen heroes is genius that their relatives can show off the graver marker in their living room. The granite also cleverly reflects ourselves literally and all the soldiers' names are recorded for ever.
There should be no border in honoring a world-class hero. Is it racist that we did not complain on the Statue of Liberty which was built by French?
To the Chinese bashers: There are no radioactivity elements implanted in the rocks that could kill every one in DC and no modern-day Trojan Horse.
The concept of touching the sky and the land is most likely a Chinese concept and most likely an idea from her parents. The simple concept of including the names of the fallen heroes is genius that their relatives can show off the graver marker in their living room. The granite also cleverly reflects ourselves literally and all the soldiers' names are recorded for ever.
There should be no border in honoring a world-class hero. Is it racist that we did not complain on the Statue of Liberty which was built by French?
To the Chinese bashers: There are no radioactivity elements implanted in the rocks that could kill every one in DC and no modern-day Trojan Horse.
Monday, August 1, 2011
Fixing the economy
US is still rich and powerful. The economy should be easier to fix but we all have to bite the bullet. Bailing out every one would only buy votes for the politicians and will not help the economy in the longer term. Economy affects every one and it should not be a political game. Here are some of my thoughts.
* When GE pays no taxes to US, but to some foreign countries, we've a problem. So are many global companies which should be headquartered in US instead of some foreign countries. We've not done enough to lure them back. At least we need to force them to pay taxes on the profits they made in US.
* The rich should pay their fair share of taxes. If we force them to pay more than their share, they will move else where. This is call the straw that breaks the camel's back or killing the goose that lays the golden eggs.
* Relax environmental enforcement on drilling and let the construction of the pipe line from Canada start. We have more natural gas than God.
* The complicated regulations and high legal expenses force some drug companies to move the research else where. If nothing is being done, I predict China and India will be the countries to produce new drugs in the next decades and we will lose the competitive edge eventually.
* We need to limit the unemployment incentive, the burden of Obamacare... to small businesses.
We have to give the rich incentives to take risk to start business, or they invest else where. Without more investment (whose objective is for profit and it is the same objective we invest in stocks), we do not have more jobs.
* There are many ways to balance the budget.
We need to cut the entitlements (I receive SS and eventually medicare). It is called bite the bullet that the politicians will not do as they want to buy your vote.
We need to encourage the poor to work instead of receiving welfare. Why should they work if work means cutting the housing subsidies, food stamp and free health care.
There are many US jobs are done by illegal aliens. Check who pick your lettuce, or empty your waste basket in your office. The poor should take out those jobs instead of fixing their motor bikes, watching TV all day long, or the teenagers taking care of their babies.
* Hiring more employees for government jobs is the most inefficient way to boost employment.
We cannot afford the two wars (one war costs us 2B a week). Why we need a carrier powered by two nuclear generators is beyond my reasoning.
I'm in IT and now in investing. Hence, I do not know much about social systems, but they're just common sense.
(c) TonyP4 2011. Written in 8/1/11. Updated 8/1/11.
#####
Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
* When GE pays no taxes to US, but to some foreign countries, we've a problem. So are many global companies which should be headquartered in US instead of some foreign countries. We've not done enough to lure them back. At least we need to force them to pay taxes on the profits they made in US.
* The rich should pay their fair share of taxes. If we force them to pay more than their share, they will move else where. This is call the straw that breaks the camel's back or killing the goose that lays the golden eggs.
* Relax environmental enforcement on drilling and let the construction of the pipe line from Canada start. We have more natural gas than God.
* The complicated regulations and high legal expenses force some drug companies to move the research else where. If nothing is being done, I predict China and India will be the countries to produce new drugs in the next decades and we will lose the competitive edge eventually.
* We need to limit the unemployment incentive, the burden of Obamacare... to small businesses.
We have to give the rich incentives to take risk to start business, or they invest else where. Without more investment (whose objective is for profit and it is the same objective we invest in stocks), we do not have more jobs.
* There are many ways to balance the budget.
We need to cut the entitlements (I receive SS and eventually medicare). It is called bite the bullet that the politicians will not do as they want to buy your vote.
We need to encourage the poor to work instead of receiving welfare. Why should they work if work means cutting the housing subsidies, food stamp and free health care.
There are many US jobs are done by illegal aliens. Check who pick your lettuce, or empty your waste basket in your office. The poor should take out those jobs instead of fixing their motor bikes, watching TV all day long, or the teenagers taking care of their babies.
* Hiring more employees for government jobs is the most inefficient way to boost employment.
We cannot afford the two wars (one war costs us 2B a week). Why we need a carrier powered by two nuclear generators is beyond my reasoning.
I'm in IT and now in investing. Hence, I do not know much about social systems, but they're just common sense.
(c) TonyP4 2011. Written in 8/1/11. Updated 8/1/11.
#####
Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
Thursday, July 28, 2011
A slow day in the market
Yesterday, the market lost about 2% and I had bought several stocks at 'bargain' prices (will find out in a month or so whether they're traps or bargains). Here are what I did to kill time, similar to what you're doing at the moment.
* Fishing.
When you do not fish (looking for good stocks to buy), you repair your net (revising better methods to evaluate stocks). Recently I found out the hard way that I really had to use two methods for evaluating stocks: 1. one for stocks I hold for longer than 12 months (for taxable accounts) and 2. one for stocks holding for an average of 4 months (for swing trades). I've about 2 years of real data from my trades to test out the parameters such as expected P/E. You may call it smart data mining or dumb data curve fitting.
* On political systems.
As opposing to popular belief, Canada is communist, US socialist, and China capitalist. It looks funny but is not far from reality. Here is my argument using health care.
Every Canadian has the same free health care (I do not know the availability and the quality) no matter how rich or how poor you're. Hence, you do not need to save and/or work hard to get better health care. This is the biggest fault of communism.
US encourages its citizens to buy health insurance, but provides it free when you're in emergency room, whether you're legal or illegal resident. That's one of the major reasons we have the most inefficient health care system.
In China, you do not pay, you die. Hence, you need to save and work hard. It is great for the rich and powerful, and a powerful way to control population growth :). I'm not saying China is a great country. The fact is there are more folks moving to US legally or illegally to US than to mainland China.
* To respond to a fellow blogger's praises with sarcasm.
I do not deserve all the flattering, but thanks anyway as it makes me feel good. It is the same feeling to hear the flatters from the prostitutes saying how great your performance is (just an observation). Do not be offended by my jokes as I do not take life seriously.
It is too late for me to make bigger bucks and I do not have a desire to do so. My secret weapon is: I do not need big bucks to be happy and my children would have no meaning in life by inheriting money (a great lesson from Buffett).
I do not see myself writing for WSJ (may be WSJunk) beside reading it, but would like to share investing ideas here and there. My work and hobby is developing a holy trail in investing. Many experts have passed same path and few succeed. Some 'succeed' due to dumb luck. This is my theory of a thousand monkeys banging on the keyboards to find good stocks. At least one monkey finds a great stock.
Buffett is very smart and he has a photographic mind. Like most 'mad' professors, he concentrates in works that are important to him. He made 10,000 times more money than us (at least than I), but he cannot be 10,000 smarter than us.
I've many theories how to develop the holy trail in investing but little time/data to test them out. There is a very high possibility that I'll find no such trail before I die, but I'll enjoy spending time in searching for one. I would die with a big smile for doing what I enjoy most, not due to fame and glory but for the chance to try something I've never tried before. It keeps me cheerful and hopeful similar to the days after I bought a lottery ticket and before the winner was announced.
If I do found the holy trail, I'll donate my life-long 'loots' to deserving (most US poor are not) charities (another lesson from Buffett) and win the Nobel Prize (please do not wake me up.) I would win it by saving/giving/working hard and Obama got his by spending. Who deserves it more? Be the judge yourself.
* On China's bullet train crash.
I hope we learn from our tragedies.
As in my previous posts, China sets the priorities wrong. It is great to be #1, but we have to consider many other issues like safety, quality control, image (esp. for China Inc), maintenance, operations, regulations, corruption (when big money involves, there is corruption naturally), pollution… You do not get promoted or get a medal for doing the above, but some could lose his/her job if something goes wrong.
There are so many past examples such as the fires on high-rise buildings, collapsing of bridges and roads... If we never learn, we will never advance. Hope it is a wake up call. If we prepare for the worst to minimize accidents, we should pad our shoulder for jobs well done, even there is no material gain.
To summarize,
A genius always minimizes accidents.
A smart man always fixes after the accidents happen.
An idiot blames the accidents on someone else and never fixes the problem.
* Your reward for your patience in reading all my garbage.
To prove how stupid I'm, I read it two times before I understand it.
In a nutshell, Mr. T defined the least expected events as black swans. It could be the reason for most of the scientific discoveries and also some investors' blunders.
Click here.
If the clicking does not work, try cut and paste.
http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm
* Fishing.
When you do not fish (looking for good stocks to buy), you repair your net (revising better methods to evaluate stocks). Recently I found out the hard way that I really had to use two methods for evaluating stocks: 1. one for stocks I hold for longer than 12 months (for taxable accounts) and 2. one for stocks holding for an average of 4 months (for swing trades). I've about 2 years of real data from my trades to test out the parameters such as expected P/E. You may call it smart data mining or dumb data curve fitting.
* On political systems.
As opposing to popular belief, Canada is communist, US socialist, and China capitalist. It looks funny but is not far from reality. Here is my argument using health care.
Every Canadian has the same free health care (I do not know the availability and the quality) no matter how rich or how poor you're. Hence, you do not need to save and/or work hard to get better health care. This is the biggest fault of communism.
US encourages its citizens to buy health insurance, but provides it free when you're in emergency room, whether you're legal or illegal resident. That's one of the major reasons we have the most inefficient health care system.
In China, you do not pay, you die. Hence, you need to save and work hard. It is great for the rich and powerful, and a powerful way to control population growth :). I'm not saying China is a great country. The fact is there are more folks moving to US legally or illegally to US than to mainland China.
* To respond to a fellow blogger's praises with sarcasm.
I do not deserve all the flattering, but thanks anyway as it makes me feel good. It is the same feeling to hear the flatters from the prostitutes saying how great your performance is (just an observation). Do not be offended by my jokes as I do not take life seriously.
It is too late for me to make bigger bucks and I do not have a desire to do so. My secret weapon is: I do not need big bucks to be happy and my children would have no meaning in life by inheriting money (a great lesson from Buffett).
I do not see myself writing for WSJ (may be WSJunk) beside reading it, but would like to share investing ideas here and there. My work and hobby is developing a holy trail in investing. Many experts have passed same path and few succeed. Some 'succeed' due to dumb luck. This is my theory of a thousand monkeys banging on the keyboards to find good stocks. At least one monkey finds a great stock.
Buffett is very smart and he has a photographic mind. Like most 'mad' professors, he concentrates in works that are important to him. He made 10,000 times more money than us (at least than I), but he cannot be 10,000 smarter than us.
I've many theories how to develop the holy trail in investing but little time/data to test them out. There is a very high possibility that I'll find no such trail before I die, but I'll enjoy spending time in searching for one. I would die with a big smile for doing what I enjoy most, not due to fame and glory but for the chance to try something I've never tried before. It keeps me cheerful and hopeful similar to the days after I bought a lottery ticket and before the winner was announced.
If I do found the holy trail, I'll donate my life-long 'loots' to deserving (most US poor are not) charities (another lesson from Buffett) and win the Nobel Prize (please do not wake me up.) I would win it by saving/giving/working hard and Obama got his by spending. Who deserves it more? Be the judge yourself.
* On China's bullet train crash.
I hope we learn from our tragedies.
As in my previous posts, China sets the priorities wrong. It is great to be #1, but we have to consider many other issues like safety, quality control, image (esp. for China Inc), maintenance, operations, regulations, corruption (when big money involves, there is corruption naturally), pollution… You do not get promoted or get a medal for doing the above, but some could lose his/her job if something goes wrong.
There are so many past examples such as the fires on high-rise buildings, collapsing of bridges and roads... If we never learn, we will never advance. Hope it is a wake up call. If we prepare for the worst to minimize accidents, we should pad our shoulder for jobs well done, even there is no material gain.
To summarize,
A genius always minimizes accidents.
A smart man always fixes after the accidents happen.
An idiot blames the accidents on someone else and never fixes the problem.
* Your reward for your patience in reading all my garbage.
To prove how stupid I'm, I read it two times before I understand it.
In a nutshell, Mr. T defined the least expected events as black swans. It could be the reason for most of the scientific discoveries and also some investors' blunders.
Click here.
If the clicking does not work, try cut and paste.
http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm
Wednesday, July 20, 2011
Intangibles in evaluating a stock
A fundamentally-sound company may not move its stock price. I give a score for each stock I evaluate. Some with worst scores have great return while some with excellent scores have worse returns.
However, I still stick with stocks I score high and once a while change my scoring system to reflect the metrics that work in current market conditions. To illustrate, the bottom and early recovery phases of the market cycle favor value rather than momentum.
* I double or triple my stack on stocks with high scores. In longer term, they are consistently better winners from my data.
* Watch out stocks with outrageous metrics like P/E of 5 or less. It could be a big lawsuit pending, expiration of some drugs...
* The technology patent of a tech company cannot be ignored even the company's P/E is high. The recent case is IDCC rising about 40% in 2 days. There is a rumor that Google is buying the company and/or Apple is bidding on it too for their mobile technology.
* The opposite is Netflix and Chipotle. They are over-priced by any measure. However, the shorters are having a tough time.
* It was quite easy to select CISCO over Apple by fundamental data (or Microsoft over Google) in 2007 but now by 2011 it was the reverse. However, the market is acting just the opposite.
* Some events the retail investor just does not know until it happens like ATSC dropped 15 or so % due to losing its second primary customer.
* After a quick run up, TZOO plunged due to missing some negligible earning expectation. It seems to be the original climbing prices had the perfect earning built-in.
* The financial data could be fraudulent or manipulated. Cash flow cannot be easily manipulated. It is a good info whether the company survives but it does not prove to be a good indicator for the performance of the stock price.
* The following are not found or are easily found in financial statements: patents, good wills, market shares, competitions, product margins, management quality, pension obligations, advertising icons...
The conclusion is the fundamentals do not always work: 1. especially in the short term. 2. many metrics are intangible. 3. Market is not rational at least not all the time.
(c) TonyP4 2011. Written in 7/20/11. Updated 7/20/11.
#####
Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
However, I still stick with stocks I score high and once a while change my scoring system to reflect the metrics that work in current market conditions. To illustrate, the bottom and early recovery phases of the market cycle favor value rather than momentum.
* I double or triple my stack on stocks with high scores. In longer term, they are consistently better winners from my data.
* Watch out stocks with outrageous metrics like P/E of 5 or less. It could be a big lawsuit pending, expiration of some drugs...
* The technology patent of a tech company cannot be ignored even the company's P/E is high. The recent case is IDCC rising about 40% in 2 days. There is a rumor that Google is buying the company and/or Apple is bidding on it too for their mobile technology.
* The opposite is Netflix and Chipotle. They are over-priced by any measure. However, the shorters are having a tough time.
* It was quite easy to select CISCO over Apple by fundamental data (or Microsoft over Google) in 2007 but now by 2011 it was the reverse. However, the market is acting just the opposite.
* Some events the retail investor just does not know until it happens like ATSC dropped 15 or so % due to losing its second primary customer.
* After a quick run up, TZOO plunged due to missing some negligible earning expectation. It seems to be the original climbing prices had the perfect earning built-in.
* The financial data could be fraudulent or manipulated. Cash flow cannot be easily manipulated. It is a good info whether the company survives but it does not prove to be a good indicator for the performance of the stock price.
* The following are not found or are easily found in financial statements: patents, good wills, market shares, competitions, product margins, management quality, pension obligations, advertising icons...
The conclusion is the fundamentals do not always work: 1. especially in the short term. 2. many metrics are intangible. 3. Market is not rational at least not all the time.
(c) TonyP4 2011. Written in 7/20/11. Updated 7/20/11.
#####
Disclaimer: All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
Why Japan should win the Women's soccer world championship
Glad Japan won the girls’ world soccer championship for the following 5 reasons.
5. US citizens are spoiled. Dumb nationalism is just dumb.
4. Too much misery in Japan. Give them a break!
3. Why US always wants to be #1 all the time. We should behave like a first class citizen. It is not Pearl Harbor as indicated in twitters and the comments of the ignorance.
2. Japanese are shorter, so they have to try harder to be even. They should change the rule on how to break the tie by the average height of the players.
#1 reason. It is God’s decision otherwise the ball would not bump into the pole that many times.
No matter what the outcome was, we all enjoyed a great game with fun and excitement. We would have a better world if we only care to fight for #1 in sports.
5. US citizens are spoiled. Dumb nationalism is just dumb.
4. Too much misery in Japan. Give them a break!
3. Why US always wants to be #1 all the time. We should behave like a first class citizen. It is not Pearl Harbor as indicated in twitters and the comments of the ignorance.
2. Japanese are shorter, so they have to try harder to be even. They should change the rule on how to break the tie by the average height of the players.
#1 reason. It is God’s decision otherwise the ball would not bump into the pole that many times.
No matter what the outcome was, we all enjoyed a great game with fun and excitement. We would have a better world if we only care to fight for #1 in sports.
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