Planning for the Unexpected

October 25, 2007

Up to this point, the recent Southern California wildfires have demolished over 1,500 homes, caused over 550,000 residents to evacuate, created over 1 billion dollars in damage, and have scorched over 425,000 acres of land. These numbers are sure to rise and it is truly a situation that no one could have envisioned. I was not directly affected by any of the wildfires, but I thought “what would I take if I only had ten minutes to evacuate my apartment?” Here is the list of what I would take (and only giving myself five minutes to make the list):

  1. External Harddrive
  2. Nintendo Wii
  3. A few days worth of clothing
  4. Bottled water and food
  5. Pillow/blankets
  6. Personal documents/photos
  7. Digital camera/video camera
  8. Cell phone charger/battery chargers
  9. Toiletry Items
  10. Matches/lighters

In the five minutes I took to compile the above list, I believe I made a comprehensive list of items that I need to survive and compact items that carry material value.

Just like you can never anticipate the occurrence of a natural disasters, you never can anticipate major hardships to your short term financial situation. Maybe the unexpected turn of events will be a loss of job, interest rate increase of an adjustable rate mortgage, medical problem, increasing schooling cost, or a home robbery. To make sure you’re prepared for any kind of financial emergency, I would recommend having four months of money available to provide yourself a safety net. That safety net includes money to cover the mortgage & pay for utilities, food, and transportation costs. Here are a few tips to help get that four month financial safety net:

– stagger your certificates of deposits (CDs) to mature at different parts of the year
– do not buy unnecessary material items just because you can put it on the credit card to be paid later
– understand that you may have to sell some stock assets to create cash flow so diversify wisely
– do NOT buy property that carries a mortgage that you cannot truly afford

Like the citizens of Southern California and Louisiana know too well, natural disasters can make life very difficult as well as create plenty of financial burdens. Although we will never know what to expect, it does not hurt to have a plan and a safety net in times of any financial emergency.


Savings Money: Books

October 22, 2007

When you need to purchase a book for cheaper than retail price, all you need is a account and the title or ISBN number of the book you want. I have found to be the most efficient way to find a book cheaper than retail price with very little difficulty. Since I when I was in college, I have saved $1855.36 off of book retail prices. I have then sold over $1000 worth of books online so my total book costs since 2002 have totaled to just around $800. Finding the book on should give you plenty of new, like new, and used book options depending on the condition you are looking for. If you need the book quickly (say for a college class), make sure to look only for sellers that offer expedited shipping options as it is only a couple bucks more than the media mail option. Since is owned by Ebay, it has a similar user feedback rating system. I would also advise to avoid sellers with zero feedback due to inexperience. It pays to only deal with reputable sellers that ship your books on time, state realistic book conditions, and provide delivery confirmation to ensure safe delivery.

Other quick checks I often will do after pricing through is to make a quick scan through Ebay and Amazon. Many book auctions on Ebay will not be heavily bidded on and there are quite a number of Ebay stores that are dedicated solely to books. Amazon also has a pretty comprehensive inventory of new and used books by individual sellers. Be aware that buying books from individual sellers is different than buying directly from Amazon so that many book purchases may not be eligible for “FREE Super Saver Shipping.”

For the more savvy book searchers who want to find the best deal possible regardless of the site, you can try book comparison sites such as Bigwords and AddAll. You will probably find that many of the best deals found are through, Ebay, or Amazon anyways. Some people may not be looking for a particular book so the local library book sales, flea markets, swap meets, and Goodwill would be some excellent places to get a book on the cheap. Why pay more for something if you don’t need to?

Ways to Play the Weak Dollar

October 12, 2007

With the dollar down against a variety of currencies as of late, there are a lot of interesting opportunities to take advantage of if you know which way things are headed.

First, if you’re expecting a continuing weaker dollar, who benefits from this? Obviously, tourists from Europe and Canada where the dollar is near all-time lows against the Euro and the Loonie. But beyond this simplistic viewpoint of currency, what about the businesses that have their cost in dollars but their revenue in other currencies? One of the little known idiosyncrasies of the commodity markets is that the rising oil prices are traded only in dollars on the NYMEX and CBOT. So while the U.S. futures market has seen near-record level prices for light sweet crude, most of Europe has been protected from these rising costs by the weakening dollar and will continue to see the benefits if the dollar remains weak and/or the price of oil drops. An example of this would be a Canadian airline that converts its cash into dollars to buy gas for its planes. While its revenue remains the same, oil purchased a few months back at $70 USD/barrel while the Loonie was at 0.9 Dollars would be near $77.8 Canadian, but even at $80 USD/barrel now with the Loonie at just above parity with the Dollar is around $79.2 Canadian. Compared to US airlines that now have a 15% increase in one of their costs, the Canadian airline has had a less than 2% increase in the same per unit cost item.

At a macroeconomic level, the weak dollar is still good for many US companies. Tourism related companies will receive an influx of customers from those in other countries that now find their currency strong against the dollar. Exports will also be on the rise for the same reason and will also narrow the trade gap. These two elements should keep job growth strong and help many of the companies that export goods around the world. But, for companies that sell their goods in dollars and have cost in their national currency (other than the Dollar), the weakening dollar will erode earnings. Companies like EADS and foreign petroleum companies tend to have costs in their own currencies since they pay local workers and make capital expenditures in foreign countries. But most of their products are sold in Dollars or exported to the US, where the weakening dollar makes their products worth less relative to their costs.

What’s an investor to do? Invest in multinational corporations based in the US. Companies that operate in my countries are hedged against moves in the dollar and benefit from stronger foreign currencies when they have to convert it back to Dollars to report their earnings. Companies like YUM Brands (YUM) with strong foreign growth and significant foreign earnings receive an extra kick coming earnings season. In its 3Q report YUM stated a “Favorable foreign currency conversion impact of about $0.02 EPS“, which equates to around $10-million Dollars in additional earnings despite missing growth targets abroad and declining sales at home.

But what if the Dollar rebounds against these currencies? The clear choice would be in domestic companies that do a lot of importing of goods. Oil companies would benefit largely due to decreased costs and many of the already hot tech stocks will be getting a boost from cheaper hardware made abroad. While these sectors are not necessarily hurt due to the weakening Dollar, any surprising rebound in the Dollar will have a highly beneficial impact on their bottom lines. I’m not going to explore this scenario much further since the Fed rate cuts do little to bring any strength back to the Dollar while other countries, like New Zealand, continue to raise their rates.

An interesting path to take regarding currency plays is to invest in areas where currencies are pegged to the Dollar. China, for instance, is pegged to the Dollar and as such investments in there neither benefit nor are harmed by currency fluctuations. So there is little to worry about if you foresee continued growth in China. While growth there continues in double-digit GDP gains, there are also a lot of other underrated markets that are also pegged to the Dollar. While the bull market in Asian growth is far from over, there is also a lot of Latin American growth that is going unnoticed. Countries like Argentina, Panama, and Ecuador are pegged to the Dollar and have also seen their GDP growth increasing lately. Be wary, though, since a lot of their growth follows oil exports, mining, and global shipping. Latin America could be an interesting play either way due to lower exposure as a less “sexy” investment area.

Whatever your views on the future of the Dollar, just remember that somewhere there is a market that’s growing.

I own shares of YUM and NMX.

Stay Away From Airlines

October 9, 2007

A major part of investing has to do with picking quality companies. Once you pick a quality company, you have to have good timing and decide when to buy into the company. Another important part of investing is to know what sectors/industries to stay away from. Sectors that have uncertain growth or have a lot of negative news should be kept on the investment sidelines.

The major sector that I’m staying away from is airlines, especially in China. The Chinese airlines include China Eastern Airlines (CEA) and China Southern Airlines (ZNH). China Eastern Airlines hit a high of $147 in the third week of September and has dropped to its current level of $95. The $50 drop has occurred in response to the news that Cathay Pacific Airways decided not to challenge Singapore Airlines in a bid for China’s third largest airline. With takeover battles being discouraged for Chinese airline companies and oil prices consistently in the $80 range, it sets up a bad equation for China airline stocks. US airline companies may not have the drastic year-to-date stock price increases compared to the Chinese counterparts, but they still have to deal with the high oil prices and a slowing US economy. Some of those US companies include Southwest Airlines (LUV), Continental Airlines (CAL), and Jet Blue Airways (JBLU) with Jet Blue taking the largest percentage drop.

Yes, people will need to fly, but with financial analysts predicting $100/barrel oil in the next couple years, that doesn’t bode well for airline stocks in any country. China Eastern Airlines also carries a debt-to-equity ratio over 16 and a negative EPS for the next quarter. I don’t expect airline stocks to take off anytime soon so look to the energy sector, casinos, wireless technology, and green energy for stocks that actually have a chance of flying.

Application of Stock Picking Basics (1)

October 6, 2007

I personally abide by buying what I know when purchasing stocks as mentioned in Stock Picking Basics (1). For illustration I will apply specialized knowledge in addition to exposure to the products and services of those companies. I like to play a lot of video games, so I visit gaming websites that have articles, news and reviews like 1up, ign, and gamespot. Each year there is an expo called E3 where big announcements are made. In 2006, the Nintendo (NTDOY.PK) Wii was announced with actual playable systems on the show floor. The writers of the gaming websites wrote extremely favorable reviews of the gaming console. At this time, the Nintendo DS was sold out and proved itself over the initial skepticism. Since the DS already illustrated what a little creativity can do, the Wii had untapped potential. The expo was in May and the Wii would come out in November. Another factor in Nintendo’s favor as a profit making entity is that they never lose money selling a game console unlike Sony (SNE) and Microsoft (MSFT). The successful games are mostly games made by Nintendo too. They make money selling the console and the associated software. All of this information would lead one to believe that Nintendo was a good investment. Indeed it was.

Buying a stock is only half of the work in investing. The other half is knowing when to sell. How would I know when to sell Nintendo? One indicator is the software sales and quality of software. If they continue to make good games, people will continue to buy them. Another indicator is when it stops being sold out at all retailers. Since the Nintendo Wii is in such scarce supply, there is a website called wiitracker that displays if the Wii is in stock at a number of retailers. It also tells you how fast the Wii sold out. If you buy what you know, you will always have a gauge on the company performance. It beats reading financial reports that are read by thousands of other people.

I happily own Nintendo (NTDOY.PK).

Book Review: The Standard & Poor’s Guide to Selecting Stocks

October 4, 2007

The Standard & Poor’s Guide to Selecting Stocks by Michael Kaye is a very solid book that focuses on the basics of stock screening. Various stock screen will yield various type of investing options depending on what one is looking for (ie growth, value, dividends, momentum, etc). Be aware that stock screening allows investors to find a list of stocks based on various financial parameters (forward P/E ratio, cash flow, market capitalization, return on equity, etc) input by the user, but does not mean that every stock returned from the screen is a winning investment option. Kaye emphasizes that screening for stocks is the first step in the investment process and should be used as a tool to keep investors informed on what options they have.

One thing I found really interesting in his screens is that in his investment screen for GARP, growth at reasonable price, many of the companies that were derived were housing stocks like Hovanian (HOV), Toll Brothers (TOL), The Ryland Group (RYL), Pulte Homes (PHM), and Centex Corporation (CTX). Some of the screening parameters included a PEG ratio of between 0 and .75 with a return on equity of at least 20%. These housing companies are nowhere near their highs from years back and still are looking for a bottom so this is an example that stock screens need to be properly evaluated even if they look like good investments at the time. Another interesting screen looked for value stocks that have a high rate of insider purchasing. One of the ten stocks returned from that screen was Las Vegas Sands (LVS) and the price was at 42.85 at the time. Holding until today would have yielded a 300% gain so sometimes it really is worth taking a gamble but using a stock screener can help allow you to take a calculated gamble while lowering your risk.

Amateur investors or experienced investors can get a lot from this book.
a) Beginners: They will find a way to learn about companies that meet their investment themes, and decide whether the company is worth researching more about.

b) Experienced: These people will already have stock investments in mind and stock screening can allow one to find out if there are better investments available. Screening needs to be done continuously, whether it’s on a weekly or month basis, because stocks that are returned from a screen will always be changing.

Things to try on your own after getting this book:
1) Based on Kaye’s stock screens in late 2004, see how the stocks returned from the screens are doing currently
2) If you like a particular stock screen, put some of the financial inputs from his stock screen to see what companies would turn out today

Overall grade: A-
I didn’t read through chapter 11 (screening for mutual funds) or chapter 12 (screening for bonds) as my main focus was to learn about screening for stocks. The first 100 pages of this 229 page book gives a very comprehensive overview of various stocks screen with many examples of each type. Again, use this book as a tool for investing and not as a magic list of stocks.

Stock Picking Basics (1)

October 1, 2007

With the advent of “systems” for investing and a new wealth of information about companies, it can be hard to figure out which stocks you want to invest in. While many commentators will tell you about a lot of different companies from a variety of industries, sometimes it helps to just simplify. One of the most basic stock picking adages is to buy what you know. There is also the corollary to buy what you buy. Now how do you put these sayings into practice.

If you are just starting out in the world of investing and have your strategy and comfort with risk evaluated, the next step is to start looking into companies you wish to invest in. Before looking for exotic companies with high returns, you really don’t even have to go to far to find successful companies that have had great returns already. For the poor college student/new college graduate that’s too lazy to cook, there are plenty of fast food restaurants that have been returning greater than 10% over the past few years. Companies like McDonalds (MCD), Wendy’s (WEN), Jack in the Box (JBX), and YUM Brands (YUM) which owns KFC, Taco Bell, and Pizza Hut are all strong companies with a lot of growth potential in the near term. When you go to these places for lunch or dinner then you’ll just be putting your money back into your investments. Plus, if you goes to these restaurants and watch how brisk business is at times, then you already have a bellweather into the health of the company’s performance. If you find you’re the only one in there, then perhaps it’s time to pull out of fast food restaurants.

Not one to partake in fast food, how about consumer electronics? Still seeing lots of iPods or hearing about all the new TV’s people are buying? Companies like Apple (AAPL), Research in Motion (RIMM) the maker of the Blackberry, Sony (SNE), or Philips Electronics (PHG) are all good places to start if you also plan on upgrading a few of your electronic toys in the near future.

So what are you spending your money on every week? Why not invest in the companies that are going to be getting your money anyways. The gas companies are not a bad idea if you have a favorite gas station to fill up your car. Ask yourself some of these questions when brainstorming about which companies to invest your money. Where are you getting your food from or what kind of drinks are your favorite? What about the clothes you buy or even the bathroom products you use? This is why the adage of investing in what you know and what you buy is such an easily understood idea that can be oft overlooked. Plus, you get the advantage of seeing how the company is actually performing without having to wait for its financial reports every quarter.

As of this writing, I currently own shares of YUM Brands (YUM).