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Mon 25 Feb 2008

Visa IPO - Price Offering Confirmed

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Visa announced today that it expects to generate nearly $19 billion in its IPO. This will easily place it as the largest IPO in the history of the United States. In fact, this will be greater than the offering of both AT&T (2000 - $10.6 billion and currently the record holder for largest IPO) and Kraft Foods (2001 - $8.7 billion combined.

Visa will be offering 406.6 million shares at a price ranging from $37-$42. Should excess supply be a problem (it will…) there is an option in place for underwriters to purchase an additional 40.6 million shares.

The official date of the IPO is yet unknown.

Ladies and gentlemen…start your engines.

Sources:
Visa IPO May Be Largest in US History
Visa plans $19 billion IPO, the largest in U.S. history

 

Mon 25 Feb 2008

Short Selling a Stock- What Is It?

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I was talking recently with one of my tax clients about investing and the topic of short selling came up.

“In finance, short selling or “shorting” is the practice of selling securities the seller does not then own, in the hope of repurchasing them later at a lower price. This is done in an attempt to profit from an expected decline in price of a security, such as a stock or a bond, in contrast to the ordinary investment practice, where an investor “goes long,” purchasing a security in the hope the price will rise.”

What does that mean exactly? I’ll try to explain it with an analogy.

Pretend that you are at a 4 day concert and that the stock you would like to invest in is water.

In order to make profit, you need to decide whether or not you believed that future circumstances would lead to the increase in water prices or the decrease in water prices. The most simple way to do this is by checking the weather forecast.

Hotter weather = Increased water prices
Colder weather = Decreased water prices

You start the first day with : $1,000
The first day of the concert is a mild day and not many people are buying water. You ‘know’ that tomorrow is going to be one of the hottest days in the summer. Imagine how much money you could make if you bought 1,000 bottles of water today $1/bottle today with the expectation of selling those same bottles of water at $5/bottle tomorrow when everyone is dying of thirst. When you purchase the water at $1/bottle, you are ‘going long’ with your investment.

You start the second day with : 1,000 bottles of water

The second day, when the sun is at its peak, you sell all of your water bottles at $5/bottle and are left with $5,000 in cash. Other individuals see how much money is being made but they have a brilliant idea: wait another day so that they can sell their water tomorrow at even higher prices when it gets hotter.

You have calculated that tomorrow is going to be a very overcast day and that the decreased demand for water is going to cause the price to drop back to $1/bottle. You decide to make a deal with some of the people that are holding onto their water until tomorrow. You agree that you can borrow 1,000 water bottles for a day as long as you give back the 1,000 bottles tomorrow. (since the people you are borrowing the water from want to sell their water tomorrow at $7.50/bottle) You immediately take the 1,000 bottles you borrowed and sell them for $5/bottle. You have just short sold 1,000 bottles of water with the hopes of buying the water tomorrow at a lower price to return to the individuals you borrowed from.

You start the third day with $10,000 in cash (from sale of your water from the 1st day’s purchase and the water you borrowed to sell) and you still owe 1,000 bottles of water to the people you borrowed from

As the third day comes around, it turns out that you were right. It is a cool summer day and people aren’t willing to pay $5/bottle (much less the $7.50 the other water sellers were hoping for); they are only willing to pay $1.50 per bottle. You immediately buy 1,000 bottles of water for a total of $1,500 and return them to the people you borrowed from. You still have $8,500 and believe that the weather on the fourth day is going to be a little hotter so you decide to take that $8,500 and purchase 5,000 bottles of water a $1.50 for a total of $7,500. You have switched your position from being ’short’ to now being ‘long’ with your investment

You start the fourth day with $1,000 in cash (your initial position)and 5,000 bottles of water. Any water you manage to sell will leave you with profit!

As the fourth day begins, it doesn’t get much hotter but you are still able to sell your 5,000 bottles of water at $2/bottle for a total of $10,000.

You end up with $11,000. You started with $1,000. In the past 4 days, you have made $10,000 by initially going long with your investment, then going short, going back to long, and then completely cashing out.

If you had come to the concert on the first day, purchased the water at $1/bottle (gone long)and waited until the fourth day to sell the water at $2/bottle, you still would have made a profit of $1,000 but by using the advantages provided by going long and by going short, you have increased your overall profit by taking advantage of the changes in market prices.

Enough with the analogy.

Hot weather is the same thing as an economic boom. There are plenty of buyers, company profits are growing at a decent rate, and stock prices are going up. During an economic boom, you buy.

Cold weather is the same a recession. Prices are falling, people are skeptical about the future, and sellers outnumber buyers causing rapid market declines. This is an excellent time to use your cash to buy undervalued stocks and to short sell. Since it is possible to lose money when short selling (if the stock price goes up), it is advisable to keep track of what is happening in the market and to maintain the same profit/loss sale rules that you do when being a ‘long’ investor.

I hope that this explanation has provided you with a greater understanding of what short selling is.

Sources:
Short Selling: Introduction
Stock Strategies : Short Selling
NAKED SHORT SELLING
Define:SHORT SELLING

 

Fri 25 Jan 2008

Can China Buy the United States?

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I begin with a premise that China will continue to be a monster. [1]

“If China were one big firm, you’d have to say the fundamentals are looking pretty good. This Communist country has plenty of capital for expansion or investment. After years of pulling off an incredibly favorable balance of trade, they’ve passed Japan and now have the largest currency reserves of any nation. With 40 percent of their output going to exports, they aren’t crippled by massive foreign debt. Unlike the United States, where most of the society lives on credit, leaving only 2 percent for the future, the Chinese are funding their own reconstruction -helping strengthen financial institutions and their capital base - through their high savings rates of over 35 percent.”

Our markets have recently been under pressure from all sides. Rate cuts by the fed will allow for more financial freedom in raising capital and will place more of an emphasis on investments in our economy. I’m not talking about the $600-$1,200 tax break you can expect this year in an attempt (likely to fail) for a stimulus package to fuel spending. I’m talking about million dollar investments in a new business venture or purchase of a condo complex; I’m talking about billion deals to buy up a failed mortgage and banking company or to infuse in the bond insurance market or EVEN the creation of new car factories to produce those vehicles that use that ‘alternate fuel stuff’ you keep hearing about.

This money comes about through loans which are issued by banks at set interest rates. As rates fall, the cost of borrowing money becomes cheaper. As costs fall, more people borrow money. If the rates get too low for too long, people borrow too much money to things that they shouldn’t be doing. Rates being too low for to long was a highly contributing factor in what led to the dot com bubble and our current real estate market woes.

Cheap money builds economies and can keep them from failing. The only thing that builds economies faster than low cost money in cash in hand or the willingness to enter dark territory which usually leads to inflation. [2] Which brings me to my point.

Guess what?!?! CHINA HAS OVER 1.4 TRILLION DOLLARS IN CASH!!!!!

“In March [2007], Finance Minister Jin Renqing announced plans to launch a new investment fund charged with managing the reserves in a more profitable and efficient manner. The fund is to be led by Lou Jiwei, a respected former finance vice minister. But nearly everything else about it - including how much money it will control and where it will invest - remains a mystery.”

“Many analysts expect that the new fund will look for ways to lighten China’s holdings of dollar-denominated assets, particularly low-yielding U.S. Treasury bonds.”

As our interest rates fall and make T-bills less and less attractive, many investors have been looking towards more attractive investments. In recent weeks, the stocks of excellent companies have been trading at greatly reduced prices. Where better to invest a $1,000,000 T-bill investment facing lower and lower rates than in the stock of a largely traded public company that has been recently falling in value. The dividend payments alone are worth more than the interest from the T-bills and the capital gains once market recovery begins will provide an excellent gain.

Right now, our financial markets aren’t headed in a direction that is certain. We are trading below our market highs and there is economic data to back up a potential recession. One thing is of relative certainty though, an investment today in a solid investment will be worth a great deal more…especially if you are dealing with a 10 year+ time horizon.

Our country isn’t for sale but the companies that operate in it are! In today’s world where global economies and investments are increasingly dependant on each other, there is money to be made whenever profitable companies go on sale. The question isn’t whether or not China is investing in the United States but how much capital they have flowing into our economy through both direct and indirect methods.

I’ve been having a lot of conversations about the opportunities that are lurking out there and what to do with my free cash flow. If you are sitting on a pile of cash, now is a great time to be looking for investments! While it is totally possible that the markets will yield you with short term losses (and you may even believe you can time the markets and find the ‘perfect time’ to buy) but when you enter into a quality investment in solid companies, the losses you might face in the short term will outweigh the gains you will make in the long term.

Keep grinding! Try to sock away as much capital as you can in your retirement accounts and in your taxable accounts so that you can keep building your asset base! The more effort you put in now, the less you will have to put in down the line when you’re looking to start spending from the gains of your investments!

If you have the cash, start looking for a place to put it. If you don’t have the cash, find a way to free it up because if you don’t start now, when are you going to start?

[1] China will be a monster. Monster as in large, aggressive, and scary. They have the cash, they have the need for a higher standard of living, and they are a rising power, not a falling one.
[2] Think organized crime, the drug industry (Cuba and Cocaine), or a state planned economy.

Sources:
China Coal and Renewables
China’s $1.2 trillion cash hoard

 

Tue 8 Jan 2008

Looking at the world’s greatest commodity…Water.

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What would you say if I told you that I had an investment idea for you? First, don’t ever take investment advise from me. View the facts, research the information, and come to your own conclusions. The facts behind investments in this product line are strongly convincing of the case for involvement in this industry but lets see if my logic makes sense.

Water.

The target market consists of over 6.5 billion individuals and is projected to grow to over 8 billion by 2025. This translates into a 19% growth rate!

Another interesting fact is that while the target consumer market grows, their demand for the product also grows!

In fact, while the target market has only doubled in the past century, demand for the product in question has increase by a factor of 5! People need water for industrial development, washing their clothes, some people even need it to water their lawns and fill their swimming pools, we all need water to survive. We need it. Without it, we die.

One of the major industry obstacles include a heavy requirement for investment (An estimated $1 trillion globally in the next 20 years) but these costs are likely to be absorbed; heavy demand growth and the fact that market consumption of the finished product is essentially guaranteed creates a market demand that cannot be ignored.

Ideal Market: China. They have 21% of the world’s population and only 7% of the available product. Their investment in their infrastructure is set to double in 2008 to $250 billion.

The product is extremely common. Most people remember the whole craze about bottled water. I’m sure that many people over 30 remember when bottled water first got big. A lot of people in the United States suddenly got the instant desire to consume all liquid refreshment from a bottle rather than a tap and the occasional garden hose, a lot or people thought that it was on the verge of sanity to purchase something you could get ‘for free.’ While according to the history of bottled water ,not exactly the most interesting subject in the world, the Yanks didn’t invent this idea. Bottled water first started back in in 1583 when the Romans started exporting water to French monarchs. (My fun fact for the day.) The bottled water industry now boasts growth of ~12%/yr.

“[E]veryone is fretting about oil, its scarcity and of course its sky-rocketing price. However, for those of us who like to think one step ahead, it might be smarter to focus on a natural resource most of us take for granted. Water.”

Everyone needs it, its demand is largely inelastic. People need water like a thirsty man needs a…glass of…water…

Less than 0.5% of the globe’s water supply is fit for consumption. The supply is somewhat fixed.

If any of this information now has you interested in looking towards investing in the water industry, please check out In Pictures: Eight Water Plays For Thirsty Investors.

The future issues that we will face with water will be encountered and there will be companies there to help as well as profit from the situation. You’re already a lifetime customer of the water industry, why not be a shareholder? I recommend PHO, a water ETF that follows the Palisades Water Index. I have faith that this investment is not one that I regret.

Sources :
Innovation: Water’s Life Saver
When did people first start drinking bottled water rather than tap water?

 

Mon 7 Jan 2008

Drip Drip Drip

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The first round of dividends FOR 2008 just came in!

$1.76 : PHO
$64.87 : EWA
$4.48 : WMT
$18.45 : EWY
$20.95 : KFT

$110.51 : Total Dividends Received

All dividends have been reinvested!

The snowball continues to grow!

 

Mon 31 Dec 2007

Year Review : Prosper Contributions

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I saved, I invested, I reinvested ALL returns, I saved some more, and invested.

I’ve made excellent progress with my Prosper contributions for the year. In December of 2006, my account balance stood at $3,153.50. At that point in time, I was receiving ~$23 in interest each month. My current balance is $8,852.44 and I am received $107.45 in interest income according to my November 2007 statement. This calculates into a $5,698 increase in my Prosper account holdings and an increase in my passive interest income by $84.45/mth.

I view the creation of $107 in passive interest income since October 2006 (15 months) to be an admirable accomplishment and am proud to say that I was able to exceed my expectations! It really wasn’t that difficult once I managed to free up the needed cash in my budget. I made some minor changes in the contributions to my three savings account funds and allocated some of my emergency fund towards Prosper where my investment could earn a higher rate of return. While it was a calculated risk that decreased my account liquidity, I’m glad I made the choice.

While increasing my Prosper account holdings was one of my major goals for 2007, I have decided to put off further contributions into my Prosper account in order to focus on accumulating cash for my taxable accounts so that I will be ready for the Visa IPO. I am pleased with my current Prosper returns and view it as an investment that I will return to although I think that my continued focus for all repayments I receive from Prosper will be directed towards building a stronger base in my other accounts. My monthly repayments in November were $335 (including interest) so the additional cash flow each month should help me quickly strengthen my positions. Without continued reinvestment, this figure will decrease from month to month but that’s ok. Below is a graph of the growth in my Prosper account during 2007.

Prosper Account Growth

As you can see, the growth of my account’s principal and returned interest has been steady throughout the course of 2007. Hopefully, my diligence in this endeavor can provide some of you with a little encouragement to start your own passive income machines. )

 

Wed 12 Dec 2007

Drip Drip Drip

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Horary from Drips!

DRIP stand for Dividend ReInvestment Program. It is a simple concept for continuous passive investment that allows for the slow and stead accumulation of stocks through the purchase of a company’s stock every time the company issues a dividend. Continued reinvestment of a company’s stock allows for you to have a guaranteed source of income. The choices for what to do with the dividend are pretty simple: Receive the cash and allocate it towards whatever form of spending you desire or to reinvest the dividend. If you choose to reinvest the dividend, you are automatically doing something called dollar cost averaging. Dollar cost averaging is the purchase of a company’s stock over an extended period of time and allows you to benefit from the changes in a company’s stock price. If a company’s stock price is high, you purchase fewer shares with your dividends and if a company’s stock price is low, you purchase more shares.

    Why do I like DRIPS?

I received a dividend yesterday for holding shares of Ship Finance International Limited (Symbol : SFL) Their stock is currently providing an 8.1% annual dividend. Basically, for every $100 worth of their stock that you own, you receive $8.10/year for being a shareholder.

Yesterday, I owned 312.1381 shares of SFL. I received a quarterly dividend for a total of $171.68. I have made the choice to reinvest all of dividends received from this investment. The reinvestment in SFL stock totals 6.2862 shares at $27.3106/share. While a mere $171.68 reinvestment might not seem like it would add up to much, it adds up extremely quickly. Since my initial investment in SFL, I have purchased a total of 300 shares since my initial purchase of the company’s stock in November of 2006. I currently own 318.4243 shares of their stock. Through dividend reinvestment, I have accumulated 18.4243 shares which at today’s price of $27.01 are worth $497.64. I received $500 in passive income through this investment. I could have taken this cash and gone on a shopping spree but I instead chose to reinvest the dividends. Here is why.

If I continue to hold onto my 318.4243 shares for the next 10 years and the company’s stock price doesn’t increase a single cent (I think it will, that is the main reason I purchased the stock. NEVER PURCHASE A STOCK JUST FOR THE DIVIDEND), the value of my shares will grow to be worth a total of $18,882.50. I will own 699.09 shares and receive an annual dividend of $1,540. ($385/every 3 months)

Wait 20 years and that dividend shoots up to $3,444/yr.
Wait 30 years and that dividend shoots up to $7,715/yr
Wait 40 years and that dividend shoots up to $17,279/yr

So if I wanted to leave my investment and eliminate changes in price, I’d have over $17,000 in annual income from the purchase of 300 shares today. My investment would be worth $212,140 and I’d have built up a pretty solid investment through one simple choice. Start today and be patient. Now, the stock price will change and it is fully possible that new economic circumstances my cause me to change my investment strategies, but I think I’ve proved my point.

For those of you do-gooders out there, lets say you are 25 years old and would like to leave a significant charitable contribution when you die at the age of…85? Or maybe you’ll be lucky enough to reach 100 as is expected of a large number of today’s 20 year olds are expected to.

Age 65: Investment is worth $212,140 with an annual dividend of $17,279
Age 75: Investment is worth $475, 129 with an annual dividend of $38,700
Age 85: Investment is worth $1,064,142 with an annual dividend of $86,676
Age 95: Investment is worth $2,383,350 with an annual dividend of $194,128
Age 100: Investment is worth $3,866,346 with an annual dividend of $314,921

That is correct. An investment of $9,000 today that compounds at a rate of ~8% will leave you with a 3.86 million dollar investment with additional growth of over $300,000/yr by the time you are dead at the age of 100. It is certainly a little morbid to think about your own demise but it is guaranteed. The benefit and impact that you can have on your life, the lives of those you love, and the lives of the planet in general with a simple investment today is far from guaranteed. I’m not selling you snake oil here, it isn’t that difficult. The mat isn’t that complex. And the concepts are easy enough for most teenagers to grasp. The question is whether or not you are willing to learn.

I think that this might shine a little light on why Warren Buffet was able to donate so much money to charity. He made smart long term investments with the eventual goal of leaving large sums of money to charity. If you’d like to make a change (not necessarily in terms of billions of dollars like Mr. Buffet) to the world, there is no reason you can’t start out on that path today.

Drips are an excellent way for you to build your financial future to a point where you can help yourself, your family and friends, and anyone of your choice. Or…you could always do nothing.

What’s your choice?

This is the link to sign up for an RSS feed to my website. :)

 

Tue 23 Oct 2007

Horray for Apple!

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Sales increasing 29% in a year to 6.22 billion, earnings per share increase 63%, gross profit margins of 33.6%, international sales are 40% of the company’s revenue.

I like what I’m hearing.

Welcome to Apple!

They sold 10.2 MILLION iPods (Up 17% from prior year)
They sold 2.16 MILLION Computers (Up 34%)
They sold 1.12 million iPhones in the past 4 months (1.39 million total)
Their new Leopard operating system comes out this Friday

Sounds like they have a lot going on…

“Mac product sales accounted for 62% of Apple’s revenue during the fourth quarter. Music products, such as iPods and the iTunes online store, accounted for 36%.” (IBD)

The financials are in line, earning per share climbing well, decent profit margins, increasing sales, multiple product lines, operating in domestic/international markets, and the market is starting to reach a mature level with late adaptors/late majority buyers buying iPods .(even if they can’t fully figure out iTunes) Their customers are loyal to the products (which are constantly improving) and their stock doesn’t show many signs of slowing.

I’ve been a holder of Apple stock for a while, their stock has been providing some great paper gains and I’m not selling in the immediate future. I still have a stop order in case Apple decides to take a tumble (unlikely in my opinion) but with a new high of ~$190 and all of the previously mentioned factors coming into play, I think that Apple is set to hit $300/share before $100.

If you are looking for a great capital gain play, AAPL may be the pick for you…but feel free to bookmark this article and refer back to it so when you miss out on a company that has a lot of forward momentum and should do quite well in the future. I plan on holding through 2008.

Additional reading/Bibliography:
Earnings: Apple Q4 Revs Jump 28 Percent; Earnings Up 67 Percent; iPhone Sales Hit 1.1 Million : Joseph Weisenthal
Apple’s Profit Soars 63%, Topping Views On iPod, Mac Sales : Investors Business Daily

 

Tue 25 Sep 2007

ETF Investing : Update #1

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Back in July, I made a couple of picks for the Exchange Traded Funds (ETFs) that I felt would be a good picks.

ETF Pick Gains

It looks like the picks are doing pretty well so far, racking up an average gain of ~3%. I believe that these funds will continue to perform well and hold steady with my picks.

 

Mon 13 Aug 2007

Management Fees : Plug the Hole in Your Leaky Bucket

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Recent Conversation:
Guy: I don’t know much about ETFs, I just invest in a mutual fund.
Me: What kind of fees are they charging you?
Guy: I’m not sure, but their performance has been pretty great in the past couple years.
Me: You don’t even know how much money they are charging you?
Guy: No.

As promised, here is the breakdown of why you should be at least a little familiar with your mutual fund’s management fees. First, a quick blurb about capital gains.

Capital Gains - The profit that is generated as a result from the appreciation of a capital asset over its purchase price. If you but $1,000 worth of stock and sell it for $1,100, you have $100 in capital gains. The $100 in capital gains is what you pay taxes on.

If you held the security for longer than one year (long term capital gain), your capital gains are taxed at a maximum rate of 15%; if you held for less than a year (short term capital gain), you can be taxed up to 28% on your earnings.

Your goal should be to purchase a security that will appreciate in value over an extended period of time to minimize taxes. But what about mutual funds that purchase stocks for capital gains? They have overhead expenses for their employees, the buildings they work in, their computers, and the fund needs to advertise; how do they pay these costs? Enter management fees.

Costs are the biggest problem with mutual funds. These costs eat into your return, and they are the main reason why the majority of funds end up with sub-par performance. (Source: Investopedia)

Take a look at Fidelity’s International Discovery Fund. If you scroll down, you can see their ‘Expenses & Fees’ section that clearly states that their expense ration is 1.09% vs the industry average for this class of mutual fund of 1.51%.

What does that mean? It means that for every $100 you have in their fund, you pay them $1.09 per year for them to manage your holdings. I really like Fidelity; they manage my 401K and offer a great selection of investments. I also greatly admire the fact that they are VERY upfront with their expenses, their returns, and their holdings. But shouldn’t I be a little skeptical about the costs they are charging me?

Most people don’t think that much about how these expenses can change their overall portfolio performance…I do. The expense ratio for the Vanguard Emerging Market ETF is 0.3%, it is also listed right near the top of the page. So, the industry average for an international fund is 1.51%, another great fund charges 1.09%, and an international ETF charges 0.3%. There has to be a reason one would choose a higher management fee; these funds must employ more talented individuals, they must have higher performance or something….right? Actually, the historical performance of mutual funds and ETFs are virtually identical. But we are talking about a difference of a respective .42 and 1.21%, that doesn’t even make that big a difference…does it?

Why pay more money for almost identical performance? Fine, we’ll crunch the numbers.

Lets take two recent college grads at 25 and assume they put $2,000/yr into an investment account. One chooses the ETF and one chooses the mutual fund. The average performance of both funds is 11%. Where will they stand in in 30 years at age 55? I’ll also go ahead and plug the numbers for an annual contribution of $4,000.(Figures found using the compound interest calculator)

ETF and Mutual Fund Fees

So after 40 years, our low cost ETF beats first mutual fund by $265,939 at 2K/yr and by $531,879/yr at 4K/yr. Our ETF beats the second fund by $383,665 at 2K/yr and $767,329/yr at 4K/yr. I guess the real question is whether or not 10 minutes of math and plugging a few numbers into a calculator is worth $767,329. Even if you are horrible at math and it took you an entire month to figure out this concept, it would yield you over $1,031/hr. ($767,329/(31*24)) Tell you what? The first five people to e-mail me at david113@gmail.com with the e-mail title ‘I would like $700,000′ will get a hours worth of my time to explain how badly fees rape you. I won’t charge you $700,000/hr…I’ll do it for free.

In case all that math was too much, I just showed you how you could get an extra $700,000 for retirement, a heck of a lot of booze, or for my personal choice which is a year long vacation during which I ‘have’ to spend $2,000/day…life sure is hard!

In terms of annual fees, how much would the ETF and our two mutual funds be charging per year 40 years down the line?

If you took the smart route and saved $4,000/yr.

ETF Fee: $7,817.69/yr
Mutual Fund 1 Fee: $22,606.79/yr
Mutual Fund 2 Fee: $27,762.36

Look, I’m not telling you to be a crazy math dork (like me) or even to make immediate changes to your investment…just do a little research so that you have an understanding of how a little fee of 1% really can make a difference in your finances.

Ohh, and guy, that difference also applies to that 1% savings account you told me about, you can find superior rates at:
Paypal:5.03%
Emigrant Direct: 5.05%
ING: 4.5%
Citibank: 5%
(Rates as of 08/13/07)

With a simple account transfer, you could easily be earning AT LEAST four-five times as much interest…just a thought!

Additional Info:
Measuring Equivalence of ETFs Versus Mutual Funds
Tools For Evaluating Index ETF vs. Mutual Fund Purchases
Mutual Funds: 14 Mutual Fund Questions That Every Investor Should Know How to Answer
Choosing the Right ETF: Growth Versus Value in Asset Allocation

 

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