Watch out for the Pump and Dump!

Not everyone has a pile of cash lying around...... but, if you do whether big or small, then you might find it a little distressing that you aren't doing something with it.  Do you still feel the sting from the economic crisis and are shying from investing?  Well not to be Debbie-downer but there's a lot of people, including myself, that say that being in cash is your most risky holding. Many say that a significant reason for the recent stock rally is that investors feel safer in stocks than in cash.  We have an environment where central banks are printing money like crazy.  It is considered better to actually have an asset.. stocks, property, energy, and commodities  versus having paper cash.  Notice I haven't mentioned bonds as a safe investment.  Remember when I asked where the next bubble was?  Yes it's in bonds;  a direct result of central banks artificially buying down interest rates.   It is now difficult to get better than 2% interest on long-term bonds.. terrible.  And when that bubble bursts and rates pop back up, the principle value of your bonds will sink.  Take this advice and tread lightly on purchasing new bonds.  (Tip : if you have older bonds, say pre-2009ish, they probably have a good interest rate and are worth keeping or selling now for a good profit).

Anyway, so back to the original question.. what to do with that lot of cash under your mattress?  Well unfortunately there aren't too many places that you can safely put all of it at once.  Investing is something that is best spread out over time..  a minimum of a year; better over many.  Why? Because ultimately the markets are like the weather.  You just can't predict with any high percentage where the market will be in 6 months or 2 years. Even most professional investors will admit that they are no good at timing markets.  I personally think that, with experience, you can build confidence with some level of market timing, but it is still unreliable at best.  A good strategy is to "ladder" your investment over time.  This is why your 401k plans are effective because they "ladder" money month to month into the market regardless.. sometimes stocks are purchased at a high and sometimes at a low.. it averages.  What you want to avoid is sitting on your pile until you get really hyped up over an investment, or until you think the market is at a major low.  It will always surprise you.

Something else to be wary of... the "Pump and Dump" effect.  Right now the stock market is at an all time high and a lot of people are excited about the profits in their portfolio.  Now is a time when you will see a lot of "pumping", where financial services companies get everyday people excited to invest more money into the stock market... driving it even higher.  Then, after Wall Street invests several short positions on the markets, coincidentally all sorts of negative financial news will emerge, which will scare the market down... making them money the whole roller coaster ride.  If you follow financial news closely.. you will see the Wall Street machine driving the news media in this Pump and Dump roller coaster.  You can defeat this by laddering your money into your investments over time.

As a final note, I do want to mention that as you ladder your money in, you can start to play with timing.  Everything cycles up and cycles down..... if the market is in a visible trough, perhaps it will pay off to put in a little extra money at that time.  Now that my portfolio is nearly fully vested, and more mature, I do focus more on waiting for troughs and downcycles.  That should come later though!  Don't just sit there collecting green paper.. come up with an extended schedule to give your money some legs.

Question for the week : What do you think will happen to the value of the US Dollar?

I am SO looking forward to being 70!!

< not >

My sense is that a lot of people already agree with me on this one but I think its still worthy of a discussion.  I'm bothered by all of the "pressure" that we seem to get about saving and saving for our retirement.  About 5 years ago I had a financial consultation from Wells Fargo about long term planning.  Basically what it came down to is that I would have to "live on food stamps" so that I could put most of my disposable income into my retirement savings.  This was required if I wanted to maintain the same level of lifestyle as I do now (not that extravagant I might add) through my retirement.  That was the first time I started to realize something was wrong with this whole retirement thing.

Ever since then, things keep happening that make me continue to question this kind of rule about saving all your money to retire.  When I used to live in San Antonio, I had these older neighbors; probably early 70s, and retired of course.  I visited every so often because they let me borrow tools, and I would normally chat for a bit.  Well, I came to realize that old people barely need money for anything!  They are still wearing the same clothes from their fifties, they finished doing all the remodeling they're going to do in the house 20 years ago (so already out-dated again), they go to bed at 730pm every night, eat like humming-birds, still driving their 20 year old cars that have less than 50k miles on them, and don't like to leave the house for long periods of time.  I remember one day I stopped by and they seemed a little more enthusiastic than normal.  It turns out that they were gearing up to go shopping.  They had discovered that they actually needed to buy something!  What was it?  An electrical extension cord.  It was the trip of the week heading out to Home Depot to get that extension cord.  I found this to be quite... depressing really.  And by the way, I know a lot of our parents are like this, so I don't mean to be degrading.  But.... it is a little depressing still.

So now my radar was up anytime I started to see things that refer to retirement planning.  The first thing that started to bother me was the commercials on TV; once again from a lot of the financial services companies, showing exactly the opposite of what I had been seeing in real life. The commercials show somewhat young looking retirees having the adventures of a lifetime because they saved and scrimped and invested for the day they retire.  They're hot air ballooning, hiking, rafting, skydiving, sitting on white sandy beaches drinking cocktails.  It's as if they're trying to show us that being 70 is the prime of our life.  Really??  I would beg to differ.  It seems to me that people in their 70s are the most happy because they are enjoying their family, and grandkids, and watching Glenn Beck.  Yes I know this is grossly generalizing, but I think its somewhat true.  I just don't see a lot of "adventure" occurring when people are that old.... they're not really interested and their bodies hurt!

Now this is really belaboring the point but I'm going to bring it out anyway.  On more than one occasion I've known of people dying within a year or two after retiring.  It just seems so tragic to anticipate it for so long, and then you're gone.  There's some physiology behind that too from what I understand.  Once you stop working, your body and mind can slow way down if you don't keep it stimulated.  It just seems like things can start shutting down.. if you let it.

I guess the point I'm trying to bring home is that a lot of us are in our physical prime now, or at least not too far beyond it :)  Why would we want to be so conservative in these years with the expectation that we will have our fun and adventures in our late 60s and 70s??  That is quite a scary line of thinking.  Now I won't delude myself to think that what I'm saying is ground-breaking.  I think a lot of us agree on these notions.  That being said, the question is what are we doing about it???  Yes we must save for our retirement.. that is not in question.  I do certainly, but I don't save anywhere close to what Wells Fargo is telling me I need to save.  I know for a fact already that when I'm old I won't need a damn thing.  Plan an adventure now when your body is still telling you that you want adventure.  Don't worry that you won't hit that target number that some software program says you need to hit.  Be smart with your money and savings, do the best you can, but put some of that buying power to use now!  Besides................ it will help the economy.

Question of the Week : What's your next adventure???

Should You Hate Goldman Sachs?

Yes absolutely!  There's a reason why Goldman achieved the image as "a vampire squid sucking on the face of humanity."  The first time I heard this was when the US economy was bottoming from the housing crisis in 2009.  Goldman showed their true colors during the crisis.  Not only were they dumping bad sub-prime mortgages onto unsuspecting clients right before housing tanked, they profited from the downfall of many companies like AIG. You may recall that about $13 billion of the taxpayer bailout to save AIG went directly to Goldman.  Why? Because they were betting that several mortgage CDOs, some of which they were selling to clients as good investments, would actually default.  Goldman made that bet by purchasing credit default swaps from AIG. Well finally in 2010 some justice was served.  Goldman decided to settle with the SEC for $550 Million for "misleading investors", which was the largest settlement every administered to a financial services company.  It pales to the $13 billion profit though.  The other really annoying thing about Goldman Sachs is their CEO Lloyd Blankfein.  He was quoted as saying that investment banks are doing "God's work".  His ego and greed are just totally off the charts.

The reason why I bring this up now is to remind everyone of the kind of forces that drive financial markets.  Remember that big investment banks, hedge fund managers, and big brokers, love the boom and bust cycles, or bubbles, because they make bets on the way up and down.  And when you're as big as some of these guys are, your investments can actually move markets.  As an example, these type of investments are blamed for running up the price of oil to over $4/gallon a couple years ago.  One thing that really bothers me is when they make a press release about where the market is going.  Often they make these releases after making big bets and are hoping that they will make millions on the reaction.  I remember reading a news release from Goldman Sachs saying that they thought oil would quickly drop to $90/barrel, and minutes later reading a release from Merril Lynch (I believe) that oil could move up to $120/barrel.  I do enjoy it when they try to sabatoge each other.  Another very recent example is with the company Herbalife (HLF).  A billionaire investor Bill Ackman invested a huge short position in Herbalife, then made a press release that he believes Herbalife is a big pyramid scheme.  Another billionaire investor, Carl Icahn, had a huge long position in Herbalife and took a big hit after Ackman's release.  Anyway they ended up duking it out (verbally) like teenagers on live TV.  Those are the good moments.  But remember, just with that press release, Herbalife's stock dropped nearly in half, and Ackman probably made millions.  These are the types of games being played, and sometimes it is on a much bigger scale.  I personally think that Bill Ackman's news release and profiteering from HLF is the same thing as insider trading and should be illegal.

This is why I like having more control over my investments.  When I refer to the "Wall Street monster" this is the type of thing I am referring to.  For the middle-income straight shooting investor like myself, these are the sharks that try to get you to invest one way so that can make money the other way.  The best thing you can do is to stay well informed, and not to be easily swayed by media hype.  Also, by paying attention, it becomes easier to pick-up on what's hype and what's not, or where you might be seeing bubble formation or even panic selling.  You may even be able to catch some good opportunities in there if you time it right.

Question of the week.  Where do you think the next bubble will be?

As a footnote, the person who coined the "vampire squid" metaphor was Matt Taibbi in a Rolling Stone article.  If you want all the dirt on Goldman Sachs, find the article at this link.
http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405

What's Wrong with Apple?

Since so many people love the products, a better question is probably to ask what is wrong with Apple's stock price.  Over the past few months, Apple stock price has fallen nearly 30% in value.  This kind of drop indicates that there is something more going on than a simple price correction.  I would guess that even those who don't follow the stock price have noticed a slight drop in enthusiasm for the products.  Though, keep in mind where the enthusiasm level started; people camping overnight and foregoing food and toilet paper to buy the latest thing.

I think the best explanation for the falling stock price stems from two primary things.  The first is that Apple is likely returning to more realistic growth expectations.  No company can sustain exponential growth forever.  This means that the stock price will start to reflect the long-term growth projections instead of the meteoric growth of the last few years.  Another way to characterize this is that Apple is evolving from a high growth company to a more "value" company.  Typically "value" companies have stable and predictable revenues, low price to earnings ratios, and often a dividend due to good cash flow.

There is a second factor influencing the stock price, which is spooking investors.  Many analysts are attributing the drop in value to Apple losing its edge over the competition.  The smart phone sales reports are showing that other products have gained a lot of ground.  Samsung's Galaxy SIII has been outselling the iPhone in recent months.  When Apple first came out with the iPhone and iPad, there was really nothing else that could compete.  After a few years, the competition has come up with a flood of products in hopes of peeling away some of those massive profits.  This is only natural, and a positive part of the capitalistic environment.  I don't think anyone would want just one choice of smartphone.

So here's more of my point of view on this.  If it is Apple's goal to continue to be number one, then I think they need to step up their game.  As an example, Apple could put out an iPhone with an oversize screen similar to the Samsung products.  One good thing is that they are developing a cheaper iPhone, the mini, to compete more in developing markets.  Apple also needs to come out with "the next big thing" to keep this story going.  There's been mention of Apple TV and some kind of wrist-watch product that perhaps could fill the bill.  Investors are wanting that product already.

As a final note to investors, be careful about this recent drop.  Some analysts are calling it a "bear trap" and are expecting to see the stock price take back 20% of the drop.  It's very possible that this is a good time to invest.  Apple reports quarterly earnings next week so watch closely.  I think they likely had a good quarter and they will get a good stock bounce.  So you might be wondering if I will invest?  I have decided to stay on the sidelines.  I think Apple will continue to put out some of the best products, but I feel that the headwinds are greater than they've ever been.  I also don't have enough confidence in Apple's management right now, and the competition has become very stiff, and often cheaper.

I will say one more thing that some people might take as a rub against Apple.  I think Apple is losing some of the original hipster free love image that it used to have.  People used to buy Apple because they weren't Microsoft, and weren't trying to monopolize the world.  Now that Apple has become so big, I'm seeing some of the bullying that we used to see from Microsoft and others.  The patent lawsuits seem to be a bit petty.  From a cultural aspect, I find recent management actions a turnoff.  I also don't like that Apple was trying to take over the Google maps function.  I think it is a mistake for Apple to become more proprietary, instead of working with the other companies people love, like Google.

 So for now, I'm just going to enjoy watching.  So what do you see in Apple's future?  Are you still keeping the faith?

Invest in Lululemon??

So last Christmas my little sister flew out of her nest in Salt Lake City to visit.  I was loving it because we always have a great time together and it had been months and months.  We didn't have a lot of days so we wanted to figure out what to do for fun.  What was at the top of the list?? Shopping at a store I had never even heard of... Lululemon.  I didn't even know how to pronounce it right because I thought it was French.  Okay so why do I bring this up?  Well, as an investor, I was definitely curious what was so great about Lululemon that my sister was ready to elbow me out of the way and leave me in a ditch to get there.

As it turns out, I was definitely impressed.  The store was loaded with what appeared to be very athletic type women with fat wallets.  And I was pretty shocked to see that my sister had no problem paying almost $100 for a T-shirt.  It was easy to see they are doing something right.

So, bringing this back to my blog theme, I want to point out that this is a great example of how you can find great investments.  Let the hedge funds invest in all the obscure companies that nobody understands.  Find companies that you can touch, feel, experience, and understand.  Most of the companies I have in my portfolio are that way.  As an example, I own McDonalds (MCD).  It's kinda boring, but I'm a customer! There's almost no better way to evaluate a company.

So back to Lululemon.  Now that it's passed my touch test, how do I see whether to put money into it?  Well first you want to check your overall portfolio and cash holdings to make sure you will still maintain risk balance and the diversification you are aiming for.  Beyond that, don't waste your time on endless charts and reports, but spend a good 30 min to an hour viewing the information available on Yahoo Finance as an example.  Here's what I saw :

First I saw a video clip with an analyst describing why Lululemon is successful.  They target the Yoga clothing market, and they make the most comfortable clothes on the planet.  That echoes what my sister was saying, because apparently it's like wearing a bubble bath.  The next thing I'll look at is the stock price chart over the last year and last 5 years.  Now this is where I get mad at my sister for visiting so rarely, because had she introduced me to Lululemon 2 years ago I'd be rich!  The stock has doubled countless times.  Next look at the financials to see if it's all making sense... a P/E ratio of 40 is pretty good for a fast growing company.  Revenue over the past 3 years has been growing intensely.  No dividend, which is typical for a growth company. They have plenty of cash and no red flags that I can see on debt.  

So do you buy it?  Well here's what I do. I already know I want it. This is a "winning" company that will likely continue to beat the competition.  Now just because I want it doesn't mean I think the stock price is a good value.  This stock has already doubled countless times and people have made a lot of money.  This in itself is a red flag.  That means the stock could fall really far if there is bad news.  As an example of this, check out last years stock chart for Chipotle Mexican Grill (CMG).  So what's my strategy? I'm going to put this stock in my "watch" portfolio and follow it.  It's corny but it's like being a hunter and waiting for just the right time when you can make the kill.  I'm going to see if there is an event of panic selling. If it drops to a good enough value, I'll jump on it.  By the way, for the first time they reported somewhat slower profit growth and the stock is already down 17% off its high.  I think it will continue to fall.  A 30% fall can be pretty compelling target point, if it gets there.

By the way, I did buy Chipotle (CMG) after the panic selling a while back, and it has started to rebound.  Buying stock after a panic selloff isn't the only strategy I use to buy stocks, but it is a great way to buy some of the "winners" out there.

So here's a question... would you buy Apple (AAPL) right now??  The stock is down around 30%.

Express Yourself!! Invest with your conscience!

In my last post, I stated that you should continue to do what works for you, but to make sure you are aware of whats actually happening out there.  I want to expand on that because I would also encourage you to take it a step further, and be more active in your investing.  For some people investing is about greed, but I would beg to differ on that, myself being an example where my interests are not about greed.  Investing is a great form of expression.  It can give you a voice where you may have previously thought you didn't have one.  It allows you to act on some things that you feel passionate about; and it could even be a political thing.  As an example, say you are so fed up with the current state of the economy, and the massive debt, that you want to make a statement about how you feel.  Put more of your money in foreign markets!  Those can be foreign stocks or bonds.  Now, of course you also want your decisions to be financially prudent, so don't do it because your pissed off.  If you believe that the U.S. is on a downhill slide, then that is a financially smart thing to do.

Now I just want to make sure I note that I do not feel that the U.S. is going to collapse.  Yes I have invested in foreign stocks and bonds, and part of it is because there is a chance the dollar could start to fail if our leadership won't get off the pot.  I like countries like Brazil, Turkey, India, and yes even China.  These are countries that have an interest in world peace and I feel good about it.  They also pay good dividends and have good growth prospects.

I choose not to invest directly into big oil and mining companies that tear down rainforests.  That said I do own some controversial stocks and that's because the investment opportunity outweighs my reservations.  Monsanto is an example.  Monsanto is an agricultural bully to say the least, but I needed exposure to commodities in my portfolio.  Other examples... I try to invest in Oregon because I believe in local business.  Umpqua Bank is an awesome example.  My brother-in-law works there and they are a huge support to local business.  Schnitzer Steel in Portland is a steel recycling company... no mining, no destruction of the environment.  Unfortunately Schnitzer is in the loss category this year, but its a great company.

So now you can see some examples of how investing can be an outlet for you.  It is like having a vote, and feeling like what you do can make a difference. Don't let me fool you though.  I am managing my money, and  at the core it is all about self interest.  I will invest in a controversial company if the return is compelling enough.. but I assure you I do have limits.

Question - what companies would you never invest in for personal or political reasons??

Feeding the Monster

I want to continue the conversation from last time due to all the chatter going on :)  A lot of us are pretty hands off on our investments.  A lot of companies have 401k programs that give you varying degrees of control over where your money goes on a month to month basis.  I know my company offers a self managed 401k and also a company managed investment trust.  Some people like my older sister have pensions with varying degrees of control (jealous!).

So I think a questions is how actively you want to manage your investments.  I think the answer to that is personal for each person.  I actively manage my stocks and make my own trades, but I really don't know for sure whether I could have done better by just putting it in one mutual fund and forgotten about it.  For now, I choose to believe that I'm doing better by making my own trades. I should note that about a third of my savings does go into my company trust, where I have absolutely zero control where it's invested.

So getting to the point, I'm not making a pitch that you change your investment ways.  It may very well work for you, and in the end you'll probably beat a lot of hedge funds out there. There is a point that I want to make; however, that ties back to my blog entry about "the Con".  Just be aware that by allowing the Wall Street machine to manage your money, you are to some extent feeding the monster.  They will take big money management fees, and, this is the most egregious part, they are making billions of dollars trading circles around this massive chunk of unmanaged money.  All of that unmanaged money makes the markets more predictable, and stable, for them to make bigger, more frequent, and more dangerous trades.  I'm sure you've probably heard of some of the quite alarming stories in the last couple years about the "flash crash", JP Morgan's "London Whale" trade (lost over 6 billion in one investment), and the countless hedge funds that have blown up.  We (the little people) are collectively like a big chunk of whale meat floating in the shark tank.  I find all of this pretty disgusting and that fuels me to not trust the machine, and my dream, beat their asses at their own game!

So.... let's see if I can get any responses.  It would be cool to get a response from say, a family member. :)  So the question is... where is your comfort level with managing your investments??