Book Review: Jim Cramer’s Real Money

March 26, 2008

Most investors have heard of Jim Cramer, host of CNBC’s Mad Money and co-founder of (TSCM). If you watch his show and never read any one of his books, you might want to reconsider. Cramer writes this book like he talks and does not try to use “smart financial terms” to prove his point.

This really is a book for all kind of investors. Investors that enjoy trading a lot will find chapters “Spotting Bottoms in Stocks” and “Spotting Tops” very useful. Beginners to the stock market will find the first one-third of the book (the first five-chapters) to be a good way to get their feet wet in understanding Cramer’s way of trading. For those who already have a grasp of how the market works will find “Spotting Stock Moves Before They Happen”, “Stock Picking Rules to Live by” (which includes his 10 Commandments of Trading and 25 Investment Rules to Live By) , and “Creating Your Discretionary Portfolio” very helpful. Cramer says things that investors may not want to hear, but he’s lost millions of dollars and made millions of dollars as a former hedge fund manager so he has the experience to back up his claims.

In the chapter about spotting stock moves before they happen, Cramer has a very interesting chart on cyclical investing and what sectors you should be investing in depending on the GDP annual growth. This chart also includes where the Federal Reserve stands with respect to lowering, raising, or keeping interest rates steady. Two points that Cramer made that I really enjoyed seeing is:

1) Emphasis on the view investors should have on P/E ratios regardless of the stock price because it allows you to compare and contrast between companies in the same sector to find out which ones are overvalued or undervalued. A lot of times, people are too concerned with how much the stock is trading for and think it’s overvalued just based on the stock price. Low priced stocks do not mean that they are any better of an investment compared to a stock price at $50/share or $125/share. You need to look past the price and look at the earnings, foward P/E ratio, cash flow, and other statistics that will help you determine if a stock is worth buying.

2) You don’t have a profit until you sell. A lot of times people will hold their stock for at least a year so they can take advantage of the reduced capital gain tax. What Cramer says is that if you have a stock you don’t believe will perform well after you’ve made a certain gain, then you might not even have a capital gain to pay tax on when that year comes around. Take your gains while you have them and don’t worry about paying taxes because if you’re paying taxes, it means you’re making money, and that’s all investors should care about.

For the investor’s who understand most of the investing foundations and want a little more insight, you may want to check out chapter 10 (advanced strategies for speculators). Cramer says, and I believe it, that even the most experienced investors don’t always understand the pros and cons of shorting and options. He outlines situations where he bet big on options and won and how you can get royaly screwed when messing around with puts and calls.

One thing I disagree with Cramer is with the emphasis he has on small-cap stock speculation. In his chapter on investing basics, he says “you can and must speculate with at least a portion of your money, perhaps as much as 50 percent when younger, in your twenties” and “I want you to seek out small-cap speculations, provided you follow my rules of good speculation.” I don’t believe you need to speculate and seek out small-cap speculation in your portfolio. I don’t mind speculation and I don’t believe it has to be with a small-cap company. Small-cap companies generally get hurt a lot harder in bear markets and even though you want stocks with great returns, you want to avoid stocks with large losses. Apple and Mastercard are great examples of stocks that returned great returns and weren’t small cap stocks with Apple returning 8x in the last 4-years and Mastercard returning about 4x in the last 2-years. These were semi speculation stocks that didn’t have market capitalizations less than 1-billion dollars. At the same time, you didn’t have to do as much homework and commit as much time as you do with small-cap companies because everyone already knew of these two companies.

Pages: 286
Release Date: March, 2005
Target Audience: Everyone
Overall Grade: A

Bottom line: Great for all levels of investors and he tells the truth. At the same time Cramer has a lot of confidence in his investment themes and methods, he also is able to point out his flaws and mistakes. He is cocky but reserved at the same time. If you can’t find your flaws, then you don’t know how to improve and the investment tips that he gives in his book will limit your mistakes in the stock market and allow you to be a more comfortable trader.

REDC ( San Diego Foreclosure Home Auction Review Part 3

March 21, 2008

Read Part 1

Read Part 2

Just a week and a half ago, Chris asked “In other words, I am curious to know if the starting values are inflated to make it seem like a better deal, or are the starting values real current values for the homes?” I would like to answer that question and analyze the validity of the previously valuation price in the REDC booklet/ushomeauction site with respect to actual present day value. First off, the starting values of the auctions are not the current values of the homes. I consider the starting bid irrelevant because the auctions are bid up so far beyond the starting bid that REDC could start each auction at $1 and it wouldn’t make a difference. This is not like an Ebay auction where you might not have people looking at your items during your auction lifetime which means you need an adequate starting bid to protect against giving away the auction. In the REDC auction process, all bidders who want to bid are present at the auction.

As I said in part 2 of my ushomeauction review, the average single family home price in San Diego was $314,000 while the average condominium price in San Diego was $204,000. Therefore I’ll analyze a single family home and condo that auctioned in line with the average price.

Case 1 (Single Family Home) – 8712 Glenhaven St. , San Diego, 92126
Previously Valued To (according to ushomeauction): $580,000
Final Auction Price: $300,000
Auction Discount with respect to previous Valuation: 48.3%

5 year Zillow housing valuation chart of 8712 Glenhaven St:

Glenhaven 5 Year Home Price Chart

10 year Zillow housing valuation chart of 8712 Glenhaven St:

Glenhaven 10 Year Home Price Chart current estimate: $492,000
Last Sale Price (according to Zillow): $515,861 on 11/8/2007

Analysis: As you can see, the foreclosed single family home auctioned for $300,000 which was well below both the ushomeauction valuation and Zillow estimate. Matter of fact, according to Zillow, the home auctioned for the same amount that it was valued over seven years ago in January of 2001. If the last sale price was indeed $515,861 in November of 2007, some home owner foreclosed on the home only 3-months after purchase and would have lost over $210,000 based on the final auction price! That is a terrible three month investment and that is why many individuals are very hesitant to get into the housing market. During the peak of the boom, this house was worth about $613,000 which is very close to the valuation of $580,000 that ushomeauction stated. It seems from this property that they are using a valuation of three years ago. That is somewhat deceiving even though it is true. It’s telling people that “hey, this home was worth $580,000…what a great deal!!!” and thinking “but it isn’t going back to that price in a very long time.”

Case 2 (Condominium) – 9362 Twin Trails Dr. #102, San Diego, 92129
Previously Valued To (according to ushomeauction): $279,900
Final Auction Price: $210,000
Auction Discount with respect to Previous Valuation: 25.0%

5 year Zillow housing valuation chart of 9362 Twin Trails Dr. #102:
5 Year Chart Twin Trails Dr

10 year Zillow housing valuation chart of 9362 Twin Trails Dr. #102:
10 Year Chart Twin Trails Dr current estimate: $290,500
Last Sale Price (according to Zillow): $246,500 on 8/3/2007

Analysis: Again based from the Zillow charts and final auction price, you can see that the foreclosed condo auctioned well below both the ushomeauction valuation and Zillow estimate of $290,500 and $279,900 respectively. In this case, the Zillow and ushomeauction valuations were only separated by $10,000 compared to the larger spread for the single family home. The ushomeauction valuation of $279,900 was far from the peak of the value of this condo during the housing boom which (according to the 5 year chart above) totaled around $381,000. And according to the previous sale price on Zillow’s site, it seems that this condo sold for $246,500 in August of 2007. Just three quarters of a year produced a foreclosed condo and a depreciation of 14.8%. This condo fell right in line with the 17% year over year decline San Diego properties experienced just within the last year.

Conclusion: In this time of rising foreclosures and when dealing with the REDC foreclosure home auctions, you should really disregard the previously valuations that they state in their booklets and website. When doing research to find out how much to bid for a particular house (or even when buying directly from a home owner), you may want to use Zillow as a housing data tool, but don’t trust them entirely either. Crunch the numbers to find out how much of a mortgage you can afford and go visit the home and surrounding area to get an idea of the health of the housing prices whether we’re in a housing downturn, bottom, or have already begun to ascend higher. As of now, we can use a general rule of thumb that San Diego properties are fetching roughly 40% below REDC previous valuation prices while silicon says that Oakland auctions for 75% below, San Jose 25% below, and Salinas at 50% below. Different areas of the country will fetch different prices depending on the health of the market and how much speculation there was during the housing boom so make sure to do your homework as I did with these foreclosure properties.

Small Cap Talk: X-Rite, Inc.

March 20, 2008

Recently, X-Rite (XRIT) popped up on my radar, because they released a new a product, Colormunki Photo. Before we see how the Colormunki Photo fits into the company product line, we must first know what the company does. They sell color management solutions.

Color Managment

Why is color management important? Let’s say I ask two people to give me a blue piece of fabric. Most likely, they’ll come back with fabrics that are different. Different shades of blue. If I want them to give me exactly the same shade of blue, I have to tell them more than just blue. There has to be some way of measuring and quantifying the color. The exact way to measure the color is to give the amount of light reflected from a given incident direction of light for each different viewing angle as a function of wavelength. If that sounds complex to you, it is. Fortunately humans aren’t that sensitive. We have 3 different types of cones in our eyes, which roughly correspond to red, green and blue. So any color we see is different amounts of red, green and blue (RGB). Computer screens generate images with red, green and blue dots. RGB is one way to represent color, but there are many more like systems CMYK, HSV, sRGB, L*ab, L*uv, etc. These are called colorspaces. So, we now we have a way to represent color.

Digital Wedding Photographer Case Study

Colormunki Photo represents a solution to the following problem. Say you’re a digital photographer and you want to make sure you have accurate color. You’re a professional wedding photographer, so orange and blue men are out. The first thing you do is setup your scene and take a test image with a color chart. The color chart is made up patches that you know the values of, because you measured them before hand with your Colormunki. When you take your picture, you know if you get values from subsequent shots, they will correspond to the same color as what you had measured earlier. Now you want to enhance the photos since these are wedding photos afterall. Your monitor needs to be calibrated, so the color that the program thinks it’s outputting is actually correct. After you’ve calibrated your monitor, you want to print out some proofs. The printer can be calibrated by printing out colors that the computer thinks its printing, so you can measure what it is actually printing with your Colormunki. Next, the bride and groom ask you to put a romantic slide show together, so you scan a few of their high school prom photos. The scanner can be calibrated by using the same colorchart you created for your photos. Finally, the wedding photographer calibrates the projector that will be used to display, so that the guest will see the same colors they are intended to see. The digital wedding photographer has used the Colormunki to calibrate a digital camera, monitor, printer, scanner and projector.

Red lipstick effect

Color calibration also needs to be repeated if ambient lighting changes, because it affects what colors you seen. Have you ever noticed that things look different under incandescent, fluorescent, and the sun? I have heard this coined as the red lipstick effect. When you buy lipstick under cheap drugstore fluorescent lights, it looks different than when you put it on to go outside, because ambient light changes. If this has ever happened to you, I hope you are convinced that color calibration is important. Color calibration is not something you do once and forget about.

Product Lines

Why did I focus on the Colormunki? Not because it is a new product, but because the rest of their products are mostly more expensive versions of the Colormunki that provide more features. Note, I have not used or reviewed the Colormunki. It may not have all the features I mentioned here, but this is what the needs of photographers are and the Colormunki Photo was designed to fulfill them. Color is important to many fields, such as manufacturing, paint, digital photography, printing, movie projectors, HDTVs, office projectors and displays.

The Company

Their products are relevant and they bought out most of their competitors, such as GretagMacBeth, Patone and others who have been bought out by companies that they bought. The only question that remains is the size of their market and their potential for growth into new markets like amateur digital photography. $500 for Colormunki is a good start, because some of those amateurs spend that much for a lens. There is no point in spending so much for a lens if you’re not even sure what colors you’re capturing, seeing and printing. Their marketing needs to convince people that they need their color solutions.

Disclosure: Currently, I own zero shares of XRIT.

2007 Tax Returns and Economic Stimulus Package

March 17, 2008

Taxes are due in a month on April 15, 2008 unless you file for an extension. You can check if you need to file by taking a look at the IRS website here. There are some people who normally would not need to file a tax return, but should file one this year to get your economics stimulus package. To get your $600 ($1200 for married couples and $300 extra for each child under 17) rebate, you need:

  1. a valid SSN
  2. at least $3,000 in income
  3. to file a 2007 tax return

A Side Note

Keep in mind that it is the after tax gains that count when you’re investing. It doesn’t help to make a lot of money one way and have the government take it all. It pays to learn about all the ways to pay less tax.

Application of Stock Picking Basics (3)

March 11, 2008

About a week and a half ago, I checked out CNN Money before I went to work to find that the S&P 500 index had dropped over 90% to 134.42!!!

CNN Money Front Page Error

Realizing that the Dow and Nasdaq were down 1.64% and 1.73% respectively, I realized that there was no way that the S&P 500 would be down such a scary percentage. Turns out that CNN Money had some kind of error where the price would be fluctuating from the erroneous value of a 90% drop to a more respectable 1-2% drop. While you probably won’t live to see a 90% drop in the S&P 500 or Dow, you will live to see tough times where the markets drop a lot in a very short amount of time. Some people run for the hills, some people don’t even want to check the prices of the stocks they own, and some people see it as a golden opportunity to buy stocks that are oversold.  After the dot com crash in 2001 and 2002, a lot of people lost serious amounts of money. On the other hand, people who invested in late 2002 and early 2003 were probably rewarded very nicely as the market escalated consistently for over four years. When investing, keep two things in mind when you have extraordinary declines in the market: cash is a beautiful friend and you don’t need to buy shares all at once.

Keep Cash on the Side

If you invest all your money at once, you handcuff yourself from opportunities when the market has declined. Since investors can’t always predict how the market will act, it is wise to keep uninvested funds available just in case stocks get depressed to prices where you see the stocks as oversold. It’s terrible to see a great buy available only to know that you can’t do anything about because you don’t have the funds to buy.

Buy in Increments Since Trading Fees are Cheap

Most investors don’t deal directly with a brokerage firm and pay exorbitant trading fees of around $100 per trade. Those days are generally over and now you can instead pay $7/trade through Scottrade or $12.99/trade through Etrade. What this allows investors to do is be more conservative with their trades by splitting up purchases of a particular stock. Say you want to buy 100 shares of Monsanto Company (MON) at $107. Instead of buying all 100 shares at $107, you can instead start by buying 50 shares at $107. Then go ahead and put a limit order of $97 to buy another 50 shares. What this does is protect you a bit of any fall in Monsanto when you buy it. If it happens to drop to $97, your average is $102/share and you’re getting it cheaper than by just buying your initial 100 shares at $107. If you like Monsanto so much, then it shouldn’t be a problem if it drops and you buy more shares because you were planning on purchasing 100 shares in the first place anyways. If Monsanto happens to increase in value and rises to $125/share, then you just made yourself a nice 16.8% gain on your 50 shares. Sure, you could have made double by buying all 100 shares in the first place, but this is a good way to protect yourself when there is downside. With this volatile market we are experiencing, buying in increments would be a good strategy to enforce throughout the rest of 2008.

REDC ( San Diego Foreclosure Home Auction Review Part 2

March 3, 2008

In my previous post about the REDC foreclosure auction in San Diego, I went over the foreclosure auction process with tips for bidders and the faults of the auctioning process. Since the end of January, the Real Estate Disposition Corporation has continued their foreclosure auctions throughout the rest of southern and northern California. Lined up for March will include the areas of Las Vegas, Washington DC, New York, Massachusetts, and Arizona. With January 2008 foreclosures up 57% from the same time in 2007, home owners will still be in for a bumpy ride throughout the rest of the year. California led all states with a staggering 57,000 home foreclosures just in the month of January of this year.

Since you know about the process of the home foreclosure auctions through REDC, I wanted to go through the details and numbers that I accumulated during the seven hour visit at the San Diego foreclosure auction. Seven hours equated to 123 foreclosed properties auctions (combination of single family homes, townhouses, and condominiums). There were at least another 80 auctions left (mainly of areas on the outskirts of San Diego like Temecula and El Centro), but I felt I had enough data from the major metropolitan San Diego areas to get a good idea of the pricing of these foreclosed homes.

Final Auction Prices

Base on the data I accumulated:
1) Average price of single family house – $314,000 (based on 62 auctions)
2) Average price of condo – $204,000 (based on 53 auctions)

From the chart below, you can see the distribution of how much the auctions sold for in comparison to the price that REDC previously values these home to be in their booklets given out at the auction and on their website prior to the San Diego auction. The average selling price of these foreclosed properties is 39.45% below the previously valued prices. The difference from previous valuation to final auction price seems to be quite wide and I will explore those valuations in another article at a later date . One thing to note in the chart below is that only one property actually sold for more than the previously valued amount. That property was a duplex (between the San Diego International Airport and Balboa Park) previously valued at $624,900 and sold for $640,000, a 2% premium. Otherwise, expect the final auction values to be at prices nowhere close to what they claim these properties to be previously valued to.

USHomeAuction Valuation Difference Graph

The majority of my data comes from locations of the primary San Diego area encompassing everywhere from La Jolla, Mira Mesa, Chula Vista, El Cajon, Carlsbad, National City, areas in and around downtown SD, and Escondido. Since I didn’t incorporate data from the properties I wasn’t present for (Calexico, El Centro, Murrieta, and Temecula), I cannot say whether they would fetch higher or lower prices in respect to their previously valued prices. I can imagine that there would be less demand for those areas since they’re farther from the metropolitan San Diego area. Therefore make sure to bid with caution and doing your homework before bidding is the best way to ensure you come away a winner.

For You Statistic Junkies

Below is a chart of the price per square foot for the accumulation of all the auctioned properties I was present for. The average price per square foot of these properties auctioned off ended up being $191.57. You will notice a few points that are above $300/square foot. Those properties are the duplex mentioned above (that sold for more than previously valued price) and a couple of condos in the heart of downtown San Diego which carry heavy premiums just based on the fact that they’re located in prime downtown locations.

USHomeAuction Price Per Square Foot Chart

Final note: Re-auctioned Properties

Throughout the auction, many properties would sell only to come back for re-auction at a later time in the day due to a number of reasons: conflicts over details of property, inability to finance property, or other miscellaneous reasons. Sometimes these properties will be re-auctioned within half an hour or it may be even longer (I’ve witnessed at least 20 auctions later). I can imagine that the primary bidders who have been outbid for a specific property will have left the foreclosure auction assuming that their desired property was no longer available. Instead, I charted that the 26 re-auctioned homes sold for an additional $255,000 (that is an extra $12,750 in premium’s added to the final auction price that goes into the pockets of REDC). Only 4 of the 26 re-auctioned properties sold for less than they did the first time around, but an astounding 70% of properties sold for more. One 1500 square foot townhouse on Normandy Dr. in Chula Vista was re-auctioned three times total with the first two re-auctions ending at a final bid of $285,000. Yet on the third re-auction of that property, the value dropped $20,000 where it did not go back onto market.

USHomeAuction Re-auction Chart