Where You Live Correlates to a 20% Investment Bias

June 27, 2015

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If you live on the West Coast, near the technology hubs of Silicon Valley, you are very likely to be overweighted in technology by 9.5 percent or so. Live in the Northeast, and you are overexposed to finance by 9 percent. Investors in the industrial Midwest are likely to have 11.8 percent more industrial companies in their portfolio than the rest of the country. The greatest overexposure is in the South, where energy holdings are 13.7 percent above the average.

Some of this overweight might be due to employee stock option plans. After all, Google’s founders, and most of its employees, live in or around Mountain View, California. Their portfolios are likely to be filled with Google shares and/or options. The same is true for JPMorgan and Goldman Sachs in New York and Boston, Exxon Mobil in Texas, and 3M in Minnesota.

Read More: Your Local Investing Bias Could Cost You –bv


Beating the Market?

March 6, 2009

Today I read an article by William Sharpe, titled “The Arithmetic of Active Management” [1]. It presents an intuitive concept that for some reason is frequently overlooked: The average invested dollar must equal the market return.

Then, after fees and commissions, the average invested dollar must underperform the market. That’s why the majority of mutual funds do worse than a random portfolio of stocks.

Tools such as derivatives and short-selling add overhead cost and also, on average, don’t beat the market. While you think you are hedging your investments by buying options contracts, another investor is thinking the same thing when he sells you those contracts.

So, unless you have compelling stock information that others don’t have, active trading will rarely help you beat the market. Mutual funds will rarely help you beat the market. Diversification, long-term investing, and choosing companies with strong fundamentals, are what beat the market.

The market has fallen over 50% since October 2007, so if you still have more than half your portfolio value from back then, Congratulations – you beat the market.

1. The Financial Analysts’ Journal Vol. 47, No. 1, January/February 1991. pp. 7-9

William Sharpe was awarded the 1990 Nobel Prize Laureate in Economics. I don’t think this is what he won it for, though.


Lessons Learned‏

February 18, 2009

Today Sirius XM radio (SIRI) was saved from bankruptcy by a supposed White Knight investor in Liberty Media Corp. (LCAPB). Because of the current credit crisis, Sirius XM was unable to refinance some of their debt obligations that were coming due this year.  While this current infusion of capital is a short-term solution, the story behind these events has a very interesting lesson.

On the face of it, if you had a crystal ball and bought shares of Sirius XM’s common stock last week, you’d have a 50+% gain on your hands and be a stock market genius.  The large rise in price is due to the subsiding fears that the company would declare bankruptcy if they couldn’t meet their $172 million debt obligation due today.  So, if the last-minute financing had failed to come through then the short sellers would’ve been right and Sirius XM’s shares would be near worthless when they went into Chapter 11 bankruptcy.  That’s the high-risk of bottom fishing for companies in this market.  Common stockholders are the last ones paid off in bankruptcy, so they’re assumed to be holding onto worthless paper in the end.  But what can you do to lower your risk?

Well, if we get back to the example of Sirius XM, you could take the position that Echostar went into when the debt payments were coming due.  By buying the actual corporate debt or preferred shares, you can hedge yourself against the risk of losing everything to bankruptcy.  By buying up the corporate debt on the cheap, Echostar was able to log a modest profit even though the original debt issue matured at 2.5% because they were able to purchase it at far below the original cost.  And while Echostar was buying up the debt to gain assets in a Chapter 11 bankruptcy proceeding as a preferred debt holder, an individual’s investment in the debt would also have not been entirely wiped out like common stockholders.

So what can be learned from this example?  If you want to take a risk on a company that may have large debts coming to term, there are other options besides common stock.  Find preferred stock and debt that has been beaten down due to the bankruptcy fears.  If the company is able to meet its obligations, a quick and tidy profit will be made.  And if not, at least you will not be able to retain some of your initial investment  Preferred stock is also a good option to consider during more normal times since they retain their value far better than the rest of the market while paying higher dividends than common stock.

Disclosure: I have current ownership in Sirius XM.


Stocks to Invest in 2009 (Energy and Dow Industrial Stocks)

February 15, 2009

2009 is the Year of the Ox according to the Chinese Astrology, but for the stock market participants, 2009 will be the Year of the Stock Trader.  You are going to see some volatile days with very big news revolving around long term oil prices, viability of the United States stimulus package, increasing unemployment, California running out of money, and whether the housing market will ever bottom out.

My strategy this year will be taking positions in companies that are being oversold and doing it incrementally instead of “going all in” like they say in poker.  If you normally invest in $3000 chunks, break that into $1500 chunks and reserve a bit of money in case that stock you love falls another 10% so you can cost average and spread around your funds to different sectors.  2008 showed us that no sector is immune to the slaughter in stock prices although some stocks only fell 40% compared to 80% from yearly highs.

With oil hitting $150/barrel and even though it’s sitting at barely 25% of that value, I am a big fan of energy and commodity stocks.   Knowing how important natural gas, coal, solar, and petroleum will be through every developing nation, it’s a golden opportunity to take a position while these prices are so depressed.  Banks and housing stocks will have many more tough times ahead of them and a lot of infrastructure stocks will follow the health of the economy.  Most of the ten investments below are ones that I believe will have a better chance to go up than down in the next few months.  If they do go down any further, just add more shares!

  • Alcoa (AA)
  • Procter & Gamble (PG)
  • Wal Mart (WMT)
  • Garmin (GRMN)
  • Diamond Offshore Drilling (DO)
  • Transocean (RIG)
  • Devon Energy Corporation (DVN)
  • Nabors Industries (NBR)
  • General Electric (GE)
  • Perdigao (PDA)

Most of these are large companies with none being small cap stocks.  6 of the 10 corporations have some kind of ties to the energy industry and all are well off their yearly highs.  I threw in some Dow Industrial stocks too for some dividend plays that shouldn’t take too big of a hit if the market tanks any further.  Take your 30% gains when they come and be a happy investor!!!

Disclosure: I have current ownership in Transocean.


Don’t Time Market, Invest Steadily

November 30, 2008

With the New York Stock Exchange bouncing around 8000-9000, investors are getting weary and people are checking their 401k totals with  eyes barely open.  It really is a rough time for the economy and for anybody who has been semi invested in the stock market, a gain for the year usually isn’t the case.  For those that have the luxury of having extra cash available for trading, do not be scared to invest because you need to see these depressed prices as an opportunity to cash in on some oversold stocks.  Alcoa (AA) is at prices not seen since 1994.  Expedia (EXPE) is generally at an all time low since they IPO’ed in mid 2005.  And that trend is similar for many other companies regardless of industry or market capitalization.

Since no one has a crystal ball, make sure you invest in increments and do not sink all your money into the market at once.  The novice investor will get anxious and be worried about missing a big upturn by chasing after stocks.   For some people, it is psychologically easier to buy stocks when they’re going up instead of going down.  When the market does head lower (as we’ve seen in recent times) and you have no funds to trade with, then you really have handcuffed yourself.

My general rule:
Invest 25% (divided into as many companies as you like) of your money every time the NYSE drops 5%.  Therefore you know you’ll only spend all your money if the market drops a total of 20% at your first observation of the current market conditions.   This is a good way to hedge your investments so that you don’t try and “time the market.”  Timing the market is near impossible unless you can tell the future.  I can guarantee you’ll never invest all your money at the bottom of the market and sell all your investments at the market peak.  Therefore be conservative in your investments, do not let emotion sway your choices, and understand that when the market is dropping, it should be seen as an opportunity to buy stocks at prices that you were unable to purchase before.


Things that are worth more than GM

October 9, 2008

Today, GM (GM) shares tumbled 31%, after tumbling for the past several weeks. GM’s market value is now 2.7 billion.

Here are some fun things that are worth more than GM’s market cap:

American Insurance Group
Dollar Tree
eBay
Facebook earlier this year, by some accounts
Family Dollar Stores
Ford
Goldman Sachs
Google
Harley-Davidson
Honda Motor Company
Iceland (for now)
Morgan Stanley
Red Hat Linux
SanDisk
Wachovia Bank
YouTube, almost

…and much more, but this is a little depressing.


Small Cap Talk: Laser TVs

July 18, 2008

Some may say laser TVs have been on the horizon and always will be, but according to recent news, they may be coming out rather soon. Two companies of interest are Novalux and Arasor Interlational (ASRYF.PK ARR.AX). Novalux was privately held and backed by a few venture funds, but was subsequently bought by Arasor.

Why laser TVs?

They offer more colors than traditional displays, so things appear more lifelike. The only technology that may come close in color fidelity is organic light emitting diode displays. They also consume less energy and produce less heat, because lasers are more efficient than light bulbs.

Potential Pitfalls

Your source also needs a lot of color information to feed the display. The main problem in developing this technology is the coherence of the laser, which could cause undesirable inference patterns. There are also other display technologies that may offer cost benefits.

Future

I foresee major inroads in small portable, quiet projectors. Conference room projectors are large, costly and noisy, because the hot bulbs require cooling, take up space, burn off and need replacements, and are less efficient than lasers. These projectors could also make for painless small home movie theaters. A possible competitor is Microvision (MVIS).

Disclosure

I’m crazy enough to own some shares, but I consider the company high risk, because they have yet to post positive earnings.