1st Year Stock Portfolio

September 28, 2007

It has been just over a year since I’ve been investing seriously in stocks; and I’d like to recap how the market has treated me and what I’ve learned over the last year.

1) Know When to Take a Loss
Every informed investor should be aware of the overwhelming problem in the subprime mortgage market that has tumbled over into the prime mortgage sector, homebuilders, and consumer spending. For a little over 2-months, I owned Accredited Home Lenders Holding Company (LEND). LEND melted down to a low around $6/share but is currently still far from their 52-week high of $36.95. Luckily I saw the negative signs early and took a minor 10% loss. If I had held until today, I would have realized a 60% loss. Some people will not want to write down a loss, but sometimes you have to figure out why a stock is down and understand if it has the fundamentals to rebound or not. In the case of Accredited Home Lenders, I didn’t see any kind of foreseeable stabilization in the housing market and I got out.

2) Ride Momentum For Big Gains
In my Las Vegas Sands investment, I got a 72% gain in just under three months and I rode the stock to new yearly highs. Instead of pulling out with a 10-20% gain, I saw the positive signs of their Venetian Macau opening, Singapore hotel casino in the works, and other investment options. Of course, I would have been up 90% if I had held it, but another thing you have to do to be a good investor is be happy with your gains, and don’t let it affect other investments. Even when LVS dropped 20 points in mid August, I knew they had good fundamentals and global growth opportunities and I wasn’t in any rush to sell.

3) It’s Hard to go Wrong With Oil/Energy
I made a lot of trades with oil and coal companies, and those companies would have provided me with even better overall gains if I had held them longer. With oil at an all time high and staying in the $80/barrel range, it is only time that is standing in the way of $100/barrel oil. Unlike technology that can get outdated, oil is not being replaced soon by any other commodity.

4) Diversity is Difficult
I truly believe that it’s extremely difficult to have a completely diversified portfolio of stocks unless you have at least $30,000 to invest. That way, you can invest in $3,000 blocks and have no more than 10% of your portfolio in any one stock. If you only have $2,000, that can buy you 2 shares of Google and 7 shares of Apple. On top of that, each stock represents 50% of your investments. Never put all your eggs in one basket so even if you have less than $30,000, at least try to invest in different sectors. As you can see in my stock investments below, I had investments in oil, coal, retail, housing, casinos, ethanol, and technology.

5) Just Make Money
For young investors, go ahead and take those short-term capital gains. Don’t worry about saving taxes by holding your stocks for more than a year because who knows if you’ll even have a positive return later. If you make a 10-20% gain in a few months, I would take those gains so you have a cushion before dipping into another investment. It is also a very good psychological boost to know that you are making profit.

My investments dating back to as far as September 2006 are shown below. I have provided information on the short term capital gain or loss that I incurred. I also included the current gain or loss I would have if I had held the stock until today.

Company Ticker Symbol Actual Gain/Loss Current Gain/Loss
Hot Topic HOTT 04.23% -25.15%
Sandisk SNDK 02.10% -07.17%
Peabody Energy Corporation BTU 03.93% 35.80%
Peabody Energy Corporation BTU 09.05% 42.48%
Statoil STO 08.34% 41.66%
Statoil STO 14.75% 50.05%
Peabody Energy Corporation BTU 09.19% 38.91%
Qualcomm QCOM 00.89% 13.61%
SAIC SAI 03.20% 02.77%
Halliburton HAL 08.37% 32.91%
BJ Services Company BJS 00.55% -10.48%
Qualcomm QCOM 00.89% 13.61%
Finisar FNSR 06.27% -22.89%
Accredited Home Lenders LEND -10.17% -60.34%
BJ Services Company BJS 12.13% 00.90%
Las Vegas Sands LVS 71.81% 90.07%
Archer Daniel Midlands ADM 03.79% 03.79%

Basics: Be Aware of Dates

September 20, 2007

Whether you’re a casual investor or an active investor, you should do occasional research about the companies that you own. It’s fine to keep up with every major news item that comes out about your company, but you should at least be aware of three key dates (listed below) and make appropriate decisions.

1) Earnings Reports Release Date

Much volatility does occur right after the release of quarterly earnings. I like to use Google Finance to find the dates that companies release their earnings under “Events”. Then if you use Google Calendar, you can conveniently add the earning release date to your calendar of events so you don’t forget about it. If you believe that a company will not meet analyst expectations or that it will be hard to maintain a level of growth in the current economy, it may be wise to sell before the earning release. On the other hand, if you notice that a company has high cash flow, low debt/equity ratio, and has a history of beating expectations, then it might be good to wait for exceptional earnings that will surprise investors and propel your stock even higher.

2) Dividend Dates

– Be aware of how often your stock pays dividends. Stocks don’t pay dividends like banks pay you interest on a monthly basis. General Electric (GE) pays dividends four times a year while China Mobile (CHL) pays dividends twice a year.

– Know when the ex dividend date is. If you aren’t an owner on a dividend paying stock before the ex dividend date, then you are not entitled to the dividend for a particular period. The payable date (dividend date) is usually a week or two after the ex dividend date so that dividend paying companies have adequate time to ensure investors that are entitled to the dividend are paid.

– Real World Example on how to miss a dividend payment:
Let’s look at JP Morgan (JPM) that pays dividends four times a year. Say you bought JPM on April 4, 2007 (one day after the ex dividend date), then you are not entitled to the .34/share dividend. Even if you bought this financial holding company on April 3, the ex dividend date, you are still not entitled to the dividend. Therefore you would have to wait until the next ex dividend date on July 3, 2007 to profit from a .38/share dividend.

3) Taxes on Short Term & Long Term Capital Gains

The tax rate on short term capital gains and long term capitals gains are different and generally apply more to long term investors more than short term investors. Short term capital gains are stock investments that are held less than one year and are taxed as ordinary income. Long term capital gains are stock investments held more than a year and taxed at a rate of:

a) 5% for the 10% and 15% tax brackets
b) 15% for the 25% and higher tax brackets

If you are near a holding period of one year and you think that the stock is going to trade flat, then just wait it out and take advantage of the long term capital gain tax benefit. If you are a few months away from the one year holding period and you believe that the stock will drop significantly, it may not be worth saving 5-15% off your capital gains. Remember, locking in a 15% gain on your investment is better than watching your stock fall below the price you paid and incurring a net loss.
Regardless of how you invest, it would be wise to be aware of earning release dates, dividend dates, and the cutoff date for a short term capital gain tax to become a long term capital gain tax. This is a major step to become a well informed investor.

Grameen Bank and Kiva.org

September 15, 2007

Investing for happiness does not always mean investing for personal financial gain. Happiness can also be obtained by investing to make a difference in someone else’s life. One prime example of investing leading to social benefit is Grameen Bank. The 2006 Nobel Peace Prize was awarded to Muhammad Yunus and Grameen Bank for fighting poverty through microloans. The bank was founded by Professor Yunus when he was teaching in Bangladesh while people were dying outside. He asked the people outside, why were they poor? Many were victims of bad loans putting them in debt for life. Soon Yunus secured funding and started Grameen Bank. The microloans are small amounts of money used to start businesses by purchasing raw materials or equipment. There are many things that differ from a normal bank. Money is loaned groups and women to ensure high probability of repayment. The bank also charges for instructional courses. By charging for those courses, it forces value to be extracted from those courses. Grameen Bank is anything but a free lunch. Instead of giving people a fish, it teaches people how to fish. It plants seeds of entrepreneurial spirit to lift people from poverty.

Grameen Bank is great, but how can you help other people. Kiva.org is an organization that provides microloans to people in developing countries. For as little as $25, you can help someone take a step toward a better life. I first heard of kiva.org from a friend and I saw it mentioned again on Oprah when she had Bill Clinton on to advertise his Giving book. The best part is that when your loan has been repaid, you can loan that money again to help another person. Helping people help themselves is fun and easy.

Make Most of Your Money: Amazon.com

September 5, 2007

With gas prices consistently over $2.50/gallon here in California, it makes even more sense to buy things online instead of wasting a couple of gallons of gas and time to drive to your local mall or Best Buy (BBY). One of the most popular online retailers is Amazon.com (AMZN), and that can be proven with their 2.89 billion dollars in revenue during the second quarter of 2007.

Many items qualify for free shipping as long as $25 worth of eligible products are purchased at the same time. It generally doesn’t make sense to buy a $21.99 Spider Man 3 DVD and spend an extra $2.98 in shipping cost when you can get free shipping by adding another $3.01 of eligible items to your cart. While the average customer would find it too difficult to find something that costs $3.01, and wouldn’t mind paying the miniscule shipping cost, you should be aware of filleritem.com. Simply typing in the amount that you want to fill into your Amazon order, you will get a listing of applicable items that are eligible on Amazon’s website. By doing a basic search (while unchecking the music and DVD catagories), I can get an extra small frog for $3.27 or a crystal orange jar opener for $3.49 to add to my order. You might not be able to use these items, but you can get more for your money while shopping on Amazon and use them as party favors, stocking stuffers, or find someone who would appreciate it more than you.

Forget Share Price, Percentage Gain is All That Matters

September 3, 2007

Some investors are very hesitant when it comes to buying cheap stocks under $10, and some investors are hesitant when it comes to buying expensive stocks that are over $100. Investors need to get out of the mindset of how much a stock cost, but instead think about the percentage gain they can make from a company or the future outlook of a particular company, regardless of its price. If you buy a $10 stock, selling at $11 is a 10% gain. If you buy a $100 stock, selling at $110 produces a 10% gain. It doesn’t matter how many shares you can buy of a company, but only the percentage gain you can attain from purchasing any given amount of shares of a company. Producing a 25% gain for your entire portfolio during any given year would be wonderful, and it shouldn’t matter how much you paid per share.

Consider the two following stock purchasing scenarios with an original investment of $2000:

1) Buy 4 shares of Google (GOOG) at $500 and attain a 20% gain by selling at $600
2) Buy 100 shares of Aeropostale (ARO) at $20 and attain a 20% gain by selling at $24

Regardless of the two scenarios just mentioned, a 20% gain and a $400 gain has been achieved. Doesn’t matter if you have an odd lot amount of shares or an even 100 shares or how much the original share price is. The 20% gain is all that matters.

Stocks with a market capitalization (outstanding shares times stock share price) under a billion dollars are considered small cap companies that usually have the best possibility to be growth stocks. Companies with over 10 billion dollars in market cap are labeled as large cap companies, and much of their primary growth phase has generally passed. It is more difficult to sustain such a large level of growth when the company is already so big. On the other hand, some examples of large cap companies in recent years that have shown much growth despite their worldwide presence are companies like McDonalds (increased 65% since the middle of 2005) or Chevron (increased 45% since the middle of 2006). McDonalds (MCD) and Chevron (CVX) represent markets caps of 58 and 157 billion respectively with dividends above 2%.

Even though I stated that small cap companies have the opportunities for the largest amount of growth, they are also more susceptible to volatility if they don’t grow as fast as investors anticipate. They will generally fall faster than large cap companies in bear markets because they won’t have as much cash flow as large companies and will probably have a higher debt-to-equity ratio. When earnings come out for these high-growth small cap companies, investors will look for earning to exceed expectations. Even just meeting expectations may not be good enough to propel the stock higher.