Friday, June 15, 2012
Stupidity has a cure!
The smart doctor asked his patient to try a new drug that could cure his stupidity. However, it is so powerful that it could kill him. He calmed his patient that his stupidity would be guarantee to be cured one way or another.
Retirees, take notice
When we retire or are being laid off, we have plenty of time. It is not good for doing nothing. However, the worst could happen to us: We invest on something we do not know and lose our entire saving. There are so many real-life examples.
Every one eats out and enjoys it. Some believe they can do a better job by opening a new restaurant. It is the human nature to be too optimistic even for the toughest business and those who surround him/her, do not want to throw cold water. Most fail miserably.
Investing in stocks is another popular one. Many take a course in day trading. If their system works that good, why they have to show it to you? When you want to invest in stocks, you should have many years of investing experience and do not gamble with your money you cannot afford to lose. Unless you're a congress woman or man using insiders' info, you are swimming with the sharks.
One retiree lost all his money in the stock market which has changed to a big casino, and died because of worries. After several years, the market revived but not he.
One retired headmaster worked as a principle in a brokerage firm. It was fame and fortune initially. He lost all his money when the firm executed his client's bets on futures in the firm's account in Hong Kong where there are less regulations for brokerage firms.
The retired and famous baseball player in Boston lost all his money from owning a video game company. He was a good baseball player, but not a business man and failure is almost a sure thing. For every successful story, there must be many failures that are not publicized as this one.
Click here for advice to a 70 year old.
In our case, no ambition is the best ambition.
Investing in something we do not understand will most likely cost us money, effort, frustration, and even our health.
Every one eats out and enjoys it. Some believe they can do a better job by opening a new restaurant. It is the human nature to be too optimistic even for the toughest business and those who surround him/her, do not want to throw cold water. Most fail miserably.
Investing in stocks is another popular one. Many take a course in day trading. If their system works that good, why they have to show it to you? When you want to invest in stocks, you should have many years of investing experience and do not gamble with your money you cannot afford to lose. Unless you're a congress woman or man using insiders' info, you are swimming with the sharks.
One retiree lost all his money in the stock market which has changed to a big casino, and died because of worries. After several years, the market revived but not he.
One retired headmaster worked as a principle in a brokerage firm. It was fame and fortune initially. He lost all his money when the firm executed his client's bets on futures in the firm's account in Hong Kong where there are less regulations for brokerage firms.
The retired and famous baseball player in Boston lost all his money from owning a video game company. He was a good baseball player, but not a business man and failure is almost a sure thing. For every successful story, there must be many failures that are not publicized as this one.
Click here for advice to a 70 year old.
In our case, no ambition is the best ambition.
Investing in something we do not understand will most likely cost us money, effort, frustration, and even our health.
Tuesday, June 12, 2012
The mysteries of P/E
P/E is the most misunderstood indicator. However, it could be the most useful one.
* Better definition.
P/E should be inverted as E/P and is termed as Earning Yield. Earning Yield is easy to compare and understand. It takes care of negative earnings for screening stocks and ranking. If you sort P/Es in ascending order, your order is wrong with negative earnings but right with E/P.
It is usually compared to 10-year treasury bill yield (or 20 or 30) or a CD rate. If the stock has 5% and your one-year CD is 1%, then it beats the CD by 4% in absolute number and actually many times better. However, the CD is virtually risk free and the future earning yield is an educated guess and it may not materialize.
* Many forms of E/P.
There are many ways to predict E/P:
- Based on last 12 months. Project it to future E/P.
- Based on analysts' educated guesses. Guesses may not materialize. From AAII screens, this one usually predicts better than the previous one that is based on last 12 months.
- Based on last month or quarter. Latest information could be better for prediction. However, they are not good for seasonal businesses like retail where most sales are done in Christmas season.
* Best E/P could not be the best.
Very high E/P could be sign of troubles ahead like lawsuit pending, fraud... You can find companies E/P over 50% and it means two years' profits could equal to the entire cost of the company! I can tell you right away they smell fishy as there is no free lunch in life. However, from time to time, some bargains exist due to certain conditions or Wall Street is just wrong about the company. You need to find whether they are bargains or traps. When low E/P (sometimes even negative) but it is improving fast, it could mean big profit.
* E/P and PEG.
For value investing, E/P is usually used, the higher the better but not extraordinary high as described above. PEG measures the rate of the stock improving earning. For growth investing, PEG is usually used. Select one that favors the current market conditions whether it is value or growth. In a secular bull market, growth is usually better than value. Value (opposite to timing) is better in early recovery stage of the market cycle - the best result is selecting top stocks sorted by Value/Timing. Value and Timing could be one metric classified by some investment newsletters/subscriptions.
* Fundamental metrics.
It is one of the metrics you should use but not exclusively. If the earning yield is high but the % of debt is too, then a good bargain may not be as good as it looks like.
Some other metrics may not be easily found in the financial statements like the intangible, insider buying, pension obligation, losing market share...
* P/E variations.
There are other P/E variations like Cape. Personally I like to compare its current P/E to the average P/E for last 5 years or compare it to the average of the companies in the same sector.
P/E is more reliable for a group of stocks like SPY instead of individual stock which has too many other metrics to deal with.
Shiller P/E (from the web) is one way to track the current market valuation. It is controversial and its value is easily misinterpreted. Hence, use it as a reference only.
When you compare the earning yield of SPY and a ETF specifying in dividends, you need to add the respective dividends to ensure a fair comparison with total returns.
* Garbage in, garbage out.
I do not trust in most financial statements of emerging countries esp. the smaller ones.
* Summary.
Again, one metric should not dictate the reason to trade a stock. All metrics can be manipulated and give different prediction in different market conditions.
* Better definition.
P/E should be inverted as E/P and is termed as Earning Yield. Earning Yield is easy to compare and understand. It takes care of negative earnings for screening stocks and ranking. If you sort P/Es in ascending order, your order is wrong with negative earnings but right with E/P.
It is usually compared to 10-year treasury bill yield (or 20 or 30) or a CD rate. If the stock has 5% and your one-year CD is 1%, then it beats the CD by 4% in absolute number and actually many times better. However, the CD is virtually risk free and the future earning yield is an educated guess and it may not materialize.
* Many forms of E/P.
There are many ways to predict E/P:
- Based on last 12 months. Project it to future E/P.
- Based on analysts' educated guesses. Guesses may not materialize. From AAII screens, this one usually predicts better than the previous one that is based on last 12 months.
- Based on last month or quarter. Latest information could be better for prediction. However, they are not good for seasonal businesses like retail where most sales are done in Christmas season.
* Best E/P could not be the best.
Very high E/P could be sign of troubles ahead like lawsuit pending, fraud... You can find companies E/P over 50% and it means two years' profits could equal to the entire cost of the company! I can tell you right away they smell fishy as there is no free lunch in life. However, from time to time, some bargains exist due to certain conditions or Wall Street is just wrong about the company. You need to find whether they are bargains or traps. When low E/P (sometimes even negative) but it is improving fast, it could mean big profit.
* E/P and PEG.
For value investing, E/P is usually used, the higher the better but not extraordinary high as described above. PEG measures the rate of the stock improving earning. For growth investing, PEG is usually used. Select one that favors the current market conditions whether it is value or growth. In a secular bull market, growth is usually better than value. Value (opposite to timing) is better in early recovery stage of the market cycle - the best result is selecting top stocks sorted by Value/Timing. Value and Timing could be one metric classified by some investment newsletters/subscriptions.
* Fundamental metrics.
It is one of the metrics you should use but not exclusively. If the earning yield is high but the % of debt is too, then a good bargain may not be as good as it looks like.
Some other metrics may not be easily found in the financial statements like the intangible, insider buying, pension obligation, losing market share...
* P/E variations.
There are other P/E variations like Cape. Personally I like to compare its current P/E to the average P/E for last 5 years or compare it to the average of the companies in the same sector.
P/E is more reliable for a group of stocks like SPY instead of individual stock which has too many other metrics to deal with.
Shiller P/E (from the web) is one way to track the current market valuation. It is controversial and its value is easily misinterpreted. Hence, use it as a reference only.
When you compare the earning yield of SPY and a ETF specifying in dividends, you need to add the respective dividends to ensure a fair comparison with total returns.
* Garbage in, garbage out.
I do not trust in most financial statements of emerging countries esp. the smaller ones.
* Summary.
Again, one metric should not dictate the reason to trade a stock. All metrics can be manipulated and give different prediction in different market conditions.
Is now the best time to buy stocks?
The best time to buy is when everyone including the shoe shine boys is selling. Some are real, easy bargains, so I use the term loots.
However, you need to hold your loots for a year or more to realize the potential profits as you're swimming against the tide.
It is from real experiences in 2003 and 2009. It worked before but it does not mean it will work for sure this time.
However, you need to hold your loots for a year or more to realize the potential profits as you're swimming against the tide.
It is from real experiences in 2003 and 2009. It worked before but it does not mean it will work for sure this time.
Investment advices from the Ivory Tower
Tim M. has been writing good articles at SeekingAlpha and is liked and adored by many. I'm not attacking him, but we have to ask:
Are we following investment advices from some one who can read, think and write without making a BUCK in the market?
How many folks at the Ivory Tower made a bundle in investing even some with Nobel prizes? Not the most beautiful minds like Newton and Einstein.
Some even made you lose big money like the Nobel prize-winning economists running LTCF to bankruptcy. Irving Fisher, considered to be the father of MPT, had several big wins, drew a lot of followers and then lost all his and his followers' money. Even the richest investor Buffett did poorly in his company in trading stocks in last 5 years.
Mutually admiring society and biases could make you poorer. I enjoy Tim's articles but it does not mean I've to follow him. I follow those who made a bundle in real life. Also even those who lose a lot as they provide valuable lessons of not to do.
Are we following investment advices from some one who can read, think and write without making a BUCK in the market?
How many folks at the Ivory Tower made a bundle in investing even some with Nobel prizes? Not the most beautiful minds like Newton and Einstein.
Some even made you lose big money like the Nobel prize-winning economists running LTCF to bankruptcy. Irving Fisher, considered to be the father of MPT, had several big wins, drew a lot of followers and then lost all his and his followers' money. Even the richest investor Buffett did poorly in his company in trading stocks in last 5 years.
Mutually admiring society and biases could make you poorer. I enjoy Tim's articles but it does not mean I've to follow him. I follow those who made a bundle in real life. Also even those who lose a lot as they provide valuable lessons of not to do.
Monday, June 11, 2012
Conscience in Investing
We work hard, save up money and buy stocks. It serves two primary purposes: 1 Good return on our money, and 2. For our country (must be news to most). In reality, the stock market is being changed to a big casino.
The company needs our investing money to develop new products and hence hire employees. When the company makes money, it pays taxes. We would not have Apple paying taxes and hiring thousands of employees if we did not finance it via IPO.
This is the ideal purpose for investment. As an investor, we need to choose the company that produces the right products that will be good for the society.
You will find few companies that produce useful products only. We need to pick companies with less evil. Here are some evils.
1. Tobacco companies. Do you invest in products that kill one of your friends? Even if you do not smoke, the second-hand smoke (and even the third-hand smoke for unborn babies) still kills.
2. Offense companies. Why do we need a carrier generated by two nuclear generators? We already have weapons to destroy the entire world with a press of a button. Boeing is OK with a small division in offense. According to NRA, guns do not kill and it is the best way to control population growth. :(
They are legal products. Special interest groups control our politicians like puppets. That's why we're the only developed country without gun control even we have school shootout every year.
3. Casinos, wine, fast food, soda...
They are border line cases. They provide good services and products if you do not take it to the extreme. They only hurt you but not others (except from drunk drivers).
Money is not everything in life once we have the basics and we should invest wisely and responsibly in products that will not harm us.
What's good if you made millions in a tobacco company that kills you via second-hand smoke? How about the young kids killed every day by guns? Sad but happening every day.
Stop counting money with hands dripping in blood and eventually the blood would be yours.
The company needs our investing money to develop new products and hence hire employees. When the company makes money, it pays taxes. We would not have Apple paying taxes and hiring thousands of employees if we did not finance it via IPO.
This is the ideal purpose for investment. As an investor, we need to choose the company that produces the right products that will be good for the society.
You will find few companies that produce useful products only. We need to pick companies with less evil. Here are some evils.
1. Tobacco companies. Do you invest in products that kill one of your friends? Even if you do not smoke, the second-hand smoke (and even the third-hand smoke for unborn babies) still kills.
2. Offense companies. Why do we need a carrier generated by two nuclear generators? We already have weapons to destroy the entire world with a press of a button. Boeing is OK with a small division in offense. According to NRA, guns do not kill and it is the best way to control population growth. :(
They are legal products. Special interest groups control our politicians like puppets. That's why we're the only developed country without gun control even we have school shootout every year.
3. Casinos, wine, fast food, soda...
They are border line cases. They provide good services and products if you do not take it to the extreme. They only hurt you but not others (except from drunk drivers).
Money is not everything in life once we have the basics and we should invest wisely and responsibly in products that will not harm us.
What's good if you made millions in a tobacco company that kills you via second-hand smoke? How about the young kids killed every day by guns? Sad but happening every day.
Stop counting money with hands dripping in blood and eventually the blood would be yours.
Lies, sex and all-you-can-eat
I was waken up by my housemates that there was a farm job with a lot of beautiful Mexican girls while attending California State University at Fresno. I tried to look my best - silly me.
It was about picking oranges and there were some ladies with their primes passed long, long time ago. The crate was higher than I. After spending one tough, sweating morning, we filled up one crate and each of us got about a dollar which we spent in a Swedish eat-all-you-can joint. We piled up the bones of a thousand of chicken wings and we became a soda machine ourselves (due to drinking too much).
Now I am really sorry for the restaurant owner and to the chicken without the wings. That is my first and last job as a laborer and the laborers gain my respect particularly the Mexican workers legal or illegal. I never have wasted a dollar since that day.
It is about lies, beautiful girls in our dreams, hard farm work, tough business to run a restaurant, the value of money... At least I have a good story to tell to my grand children and of course with the beautiful young ladies instead of the old ladies to make my story more interesting.
It was about picking oranges and there were some ladies with their primes passed long, long time ago. The crate was higher than I. After spending one tough, sweating morning, we filled up one crate and each of us got about a dollar which we spent in a Swedish eat-all-you-can joint. We piled up the bones of a thousand of chicken wings and we became a soda machine ourselves (due to drinking too much).
Now I am really sorry for the restaurant owner and to the chicken without the wings. That is my first and last job as a laborer and the laborers gain my respect particularly the Mexican workers legal or illegal. I never have wasted a dollar since that day.
It is about lies, beautiful girls in our dreams, hard farm work, tough business to run a restaurant, the value of money... At least I have a good story to tell to my grand children and of course with the beautiful young ladies instead of the old ladies to make my story more interesting.
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