Texas Hold’em Mentality Correlates with Stock Market Investment

January 29, 2008

Being an amazing texas hold’em player does not guarantee that you will be an expert in the stock market, and being a standout stock investor does not ensure that you will be successful in poker. What I do believe is that the mentality that people have in poker cross correlates with the mentality of how people invest in the stock market. If you can understand how to keep your composure during grueling games of texas hold’em, then you should have the mental capability to play the stock market effectively in any kind of environment.

Types of Players:

Gamblers
Poker Characteristics: Irrational, willing to play with any hand, and will pay a lot to see the turn and river
Stock market mentality: These people get a rush off of making big gambles, and also can be labeled as momentum investors. They forget about fundamentals and price valuations and rather ride momentum to make quick short-term capital gains. When they buy an investment and it proceeds to drop 5% below their purchased price, they get frustrated and sell or double up to make money quicker (being on tilt in poker lingo). Long-term investing one or two years down the road usually isn’t an option.

Logical Conservatives
Poker Characteristics: Able to read other players, knows when to fold a hand even if it’s strong, and doesn’t run after a hand that is statistically hard to obtain
Stock market mentality: These people are very successful investors who have set price targets, and don’t invest on emotion. Instead they use company statistics, recent economic news, and current market conditions to decide whether to buy or sell. They may not make exorbitant amounts of money in the near term but they also won’t take huge losses on their investments because they’ve done their research and analyzed the cost-benefit of the situation.

Low Risk Takers
Poker Characteristics: Only hold onto ultra strong hands (like pairs, Ace/King, high suited connectors) and try to bait people all the way through the river
Stock market mentality: These investors take on very little risk, and have portfolios that mainly consist of high paying dividend stocks or a portfolio full of mutual funds. They take pride in knowing they will have a constant source of income and prefer not to have huge portfolio swings. Stocks with high P/E ratios and small cap companies are usually not part of their investment strategies. By only playing when they know they’ll probably win, they’ll miss a lot of opportunities by playing too fine and not exposing themselves to any high risk securities.

Rookies
Poker Characteristics: Unable to bet effectively, unable to adapt to playing heads up after starting with a large poker group, and plays too many hands
Stock market mentality: These people shouldn’t even be in the stock market and should instead be experimenting with Virtual Stock Exchange to get their feet wet with imaginary money before using their actual hard earned dollars.

In the recent market turmoil, there exists two primary types of people. One type are people who are able to restrict their purchases, leave a chunk of money on the sideline for further market decreases, and buy when quality stocks are oversold. The other type are the people who get scared because their portfolios are going more into the red and cannot stand losing money and panics. When people panic, they either sell their quality stocks with good fundamentals, are too scared to get back into the market quickly (and will miss opportunities to recover losses), or buy more stock of their depreciated current assets just to cost average without thinking about why the stock went down in first place.

Next time you play the market, think of how you play poker and it may help your mentality in rough times and good times to help you make rational decisions.

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1031 Tax Deferred Exchange

January 25, 2008

Although the 1031 tax deferred exchange doesn’t apply for a majority of Americans, it is something that can save you a lot of money if you ever get into the situation. A 1031 tax deferred exchange allows you to take the proceeds from the sale of an investment property and roll it into another similar investment property. As long as you use the proceeds toward a similar investment property, any capital gains will be delayed until later.

Instead of paying the government capital gains tax on your investment property sale, the saved capital gains tax can act like an interest-free cash investment into another property that hopefully will be a more lucrative investment for you. Since a larger sum of money is being put into another investment property (or two), you can invest in a more lucrative piece of investment property that should ideally appreciate at a higher rate.

Be aware that this type of exchange cannot be used for the sale of or purchase of a property for personal residence. Also if you want to make an exchange from one property to two or vice versa, that is also viable.

Important Dates

  • 45 days from the sale of your investment property to choose up to three possible replacements investment properties
  • 180 days from the sale of your investment property to close the sale of one of the replacements you listed within the first 45 days

For further detailed information, refer to the details through the IRS website or see the PDF of form 8824 (like-kind exchanges).


Stocks to Invest in 2008

January 22, 2008

Investors are scared, people are trying to figure out if we’re really in a recession, and even President Bush is doing his part to help stimulate the economy. Instead of getting scared and jumping off the investing boat, just make sure that you have a diversified portfolio that can perform as well as possible because past recessions have not lasted longer than about a year and stocks are still going to do well in the long run. Five years from now, we will not be scared of subprime mortgages, credit crunch, or oil prices hindering consumer spending. Ten stocks that I am trying to buy or have already bought (every stock with exception of Aluminum Corp and Schlumberger) that I believe will do well in the long term are as follows (in no particular order):

1. Las Vegas Sands (LVS)
2. Wynn Casinos (WYNN)
3. Aluminum Corp of China (ACH)
4. Schlumberger (SLB)
5. Cemex (CX)
6. Wachovia (WB)
7. Trinity Industries (TRN)
8. Sandisk (SNDK)
9. Broadcomm (BRCM)
10. Valero (VLO)

With the list above, I believe I have a good combination of large cap companies, companies in various sectors, and most importantly, companies that have the capability to weather rough times. A truly diversified portfolio would require at least 25 different stocks (mutual funds must have 20 different companies in their investments according to the SEC) but not all of us have enough money to purchase that many different companies.

Also foreign revenue on average accounts for 30% of companies revenue and a good number of the above companies have healthy international exposure. It’s never a guarantee that they will all make money from this point in time, but I think it’s a portfolio with a lot of upside. At this point in time, Wachovia is the riskiest investment, but assuming they don’t cut their dividend, I’ll take their 8.3% dividend. Also I prefer Las Vegas Sands and Wynn Casinos over MGM because I believe their casinos are stronger and the growth in other countries are much better for the former two.

Speculation play: If Wynn Casinos is able to acquire a gambling license to build a mega casino hotel in Tokyo, it’s going to blow through the roof.


Buying Things Online

January 19, 2008

I have refined shopping online to a few easy steps. First, I have Ben’s Bargains, Sickdeals, Woot, Techbargains and Dealnews all on RSS feed in a folder on my bookmarks toolbar in Firefox. That way I can browse through all the deals with only one mouse click.

Keeping Up With Latest Deals

Ben’s Bargains – Lists deals from big reputable vendors. This is my favorite site since it lists items most relevant to me; mostly technology items, but there are other items such as jewelry.

Slickdeals – Lists a few really good deals. This site is excellent for knowing about really great deals.

Woot – Sells one item a day usually. The item can be refurbished or slightly old technology. On special days, woot-offs, they keep selling a single item until they run out of stock. Some fanatics just buy some lackluster items to move on to better stuff. The most sought after item is a bag of crap, which may contain anything. To date there has only been one item I wished to purchase from woot, and it was 66% off the next lowest I could find elsewhere.

Techbargains – Lists technology related deals.

Dealnews – Lists general deals.

Comparison

Those sites above are for finding out about deals, but usually you have something in mind that you wish to purchase. You can keep checking the deals sites to see if your item goes on sale or you can use price comparison tools if you need to buy it now.

Pricegrabber – good for finding prices from many internet vendors, but the merchants might not all be reputable.

Bigwords – Finds the lowest cost option for purchasing books, DVDs, CDs, Video Games.

I also check fatwallet to see if the specific store has any coupon codes.

Fatwallet – good for finding the historically lowest ever price on a product such as digital cameras on Dell.com. Forums are a wealth of information, but many of deals are hard to get. Fatwallet has a program that shares affiliate revenue with you, so you can save even more money.

Books, Movies, Music and Video Games

I use Bigwords for comparison shopping. Then Amazon.com Marketplace and Half.com explicitly since their prices are usually the lowest because you are buying from another person who is trying to undercut the next person. Great for buying used textbooks.

Amazon.com Marketplace – Buy new and used from other people. Just click on the buy new and used link.

Half.com – You can also buy sell movies, video games and CDs. Now owned by eBay (EBAY).

Yourmusic – This is a music subscription site much like the 12 CDs for the price of 1 BMG club advertisements, but you can cancel anytime and buy only what you want. You fill up a queue of CDs and they send you one every month. Just remember to keep your queue full.

Electronics

For electronics such as monitors, printers, cameras, Dell and Amazon are pretty good. For computer parts, I check the price on Newegg and pricegrabber to find the lowest price. There have been rumors of a Newegg IPO for many years, but nothing has yet to materialize.

Newegg – Large computer part retailer based in Southern California with warehouses position across the country, so they can ship anything to you within 3 days. They might not always have the lowest price, but their prices are very reasonable or the next lowest price. Their service and turn around time is excellent.

Dell – They periodically rotate their deals, so you will have to wait to get the lowest price. Be aware that they charge tax in some areas and you can often get free shipping. For an added bonus you can buy a one-time use coupon on eBay.

Amazon.com

Amazon.com (AMZN) is my favorite website because there is no sales tax since I am not a Washington State resident and they often have free shipping. When you add an item to your cart and move it to buy later, every time you check your cart you will be notified if the price has changed. This is a good way to find out when they lower the price of an item you don’t immediately need, so you can buy it at the cheapest price. If you sign up for an Amazon.com credit card, they will give you $30 and 3% back on Amazon.com purchases and 1% back on all other purchases. For reoccurring purchases, Amazon.com has a subscribe and save program that gives you an extra 15% off. This usually makes their prices the lowest. If I don’t know what specific item I want to buy, I check on Amazon.com and use Savvygraph.

Savvygraph – Plots the rating and number of reviews for items from Amazon.com. This allows you to see at a glance the popular opinion of a variety of products. For example if you’re looking for a DVD player or a new HDTV.

Go forth and save.


Blu-ray wins High Defintion Battle

January 19, 2008

Blu-ray has been declared the winner of the high definition video disc format wars after Warner jumped ship to become exclusively Blu-ray. The war is not over, but since many people are declaring it over (including me), it only puts more nails in HD-DVD’s coffin. When you go to the store or ask your technically inclined friends, they will steer you in Blu-ray’s direction because HD-DVD can is perceived as inferior since there are less studios supporting it and the premium cable effect. When makers of some cables raised their prices, they sold more cables, because their product was perceived to be better since it was more expensive. Since the United States has not switched to digital versus over the air broadcasting, many homes including mine have yet to purchase a HDTV, which is needed to enjoy high definition video. From an investor’s standpoint, the switch over to digital broadcasting represents a good opportunity.

Sony (SNE) has much to gain with the success of Blu-ray since they are the ones who created the format plus provide the content and the hardware. The Sony Bravia LCD line is doing exceptionally well, enough to even dampen losses from the Playstation 3’s development costs. Sony’s Playstation Portable actually sells better than its state-of-the-art Playstation 3. The Playstation 3 is also seeing a pickup in sales after price cuts, which will only get better when Metal Gear 4 and other platform exclusive games come out.


Stay Away From Retailers and Restaurants

January 10, 2008

As we start off the year, the market has taken a tumble and continuous talk of recession has spooked investors into beating down the Dow toward 12,500. If you’re bargain hunting, make sure to bargain hunt away from the retail or restaurant sector. Even if we aren’t in an official recession, we are definitely in a slowing economy. The first causalities will be retailers and restaurants since people will realize that they will need to cut down their materialistic purchases and amount of times they eat out in a given month.

On late Thursday, the retail sector reported weak December earnings. The holidays of 2007 marked the slowest holiday retail season since 2002 and many retailers failed to meet lowered earning expectations. With the down housing market poised to last longer than previously expected and a bottom nowhere in sight, retailers will have to go above and beyond to lure customers into their stores.

Ann Taylor (ANN), Macy’s (M), Limited Brands (LTD), Abercrombie (ANF), PF Changs (PFCB), Red Robin Gourmet Burgers (RRGB), Jamba Juice (JMBA), Target (TGT), Talbots (TLB), and many others better get ready for a rough first half of 2008. In the business world, the customer comes first so you better satisfy the customer or they’ll stay home. In previous entries, I advised to stay away from airlines and to stay away from homebuilders. I was very on target with both of those sectors and I foresee it being very tough until at least the start of summer for this sector. Why mess with retail when you have plenty of good options in technology, casinos, and energy?


Flashback: Archer Daniels Midland

January 8, 2008

Since the market is down a lot since the start of the year, I checked Archer Daniels Midland (ADM) to see how it was faring in comparison to the rest of the market. Indeed, ADM is the place to be. The other 4 companies mentioned in a previous post about ethanol are all down from their price 6 months ago. A lesson learned is not to pick companies with their eggs all in one basket. The question is now, whether to hold on to what you have or to sell and take your profits.