April Networth Update

This was an interesting month, where I found myself on the short end of a bank account when I accidentally paid my credit card bill the day a bill was generated, rather than the due date. This along with a week-long visit by a friend, where we indulged on steak and seafood much of the week, caused this month's networth growth to be a meager $600.

My current networth is -$11,162.59 or -1.12% from my goal.

However, as many of you know, I have embarked upon an interesting venture, which by October, could net me a one month big jump or decline, depending on my investment picks.

If you look at my networth statement, you can see that Card #1 has a huge outstanding debt, which is offset by a $6,500 investment account asset. I have borrowed $8,500 at 0% from that card for 6 months, and I'm investing $6,500 of it in the stock market, while holding $2,000 in my bank account collecting interest. I hope that this two-prong method will allow diversification in this "investment" and provide me a net profit after I pay back the loan.

I've included my networth chart below, and you can see that the past few months have not been good for my networth goals. I will have to work hard in May to get back on top.

Investment Update

On Thursday, after the Fed announced a rate cut and indicated future rate cuts were on a hiatus, the market reacted unexpected, crashing after about 30 minutes of upward momentum. I thought this was the wrong way to react to such a positive economic indicator, and I bought more Dow Jones Industrial Average ETF Call Options.

Today, the market thought about the news, and reacted very positively, ending over 13,000! This helped me make a quick one-day profit. The following is my current position:

In the month of April, I've netted $555.24 in trading profits, or about 6.5% of my original loan, surpassing my monthly 6% return goal.

I will be taking my profits out around middle of May to pay back principal, and fees on the loan.

Here we go financials...

I was expecting the other shoe to drop today on financials, as more big names announce earnings this week. I had also expected some negative news out of National City as well.

With the announcements made by Bank of America and Nat City, I think we are well on our way to the financial sector recovering from its December-January Bear Stearns slump.

The financial sector itself has depressed for several months, with rising inflationary concerns coupled with sub-prime mortgages. However, after this week, my expectation is that the volatility and negative sentiment for this sector will be over. The major banks have laid their problems all on the table, and while there is no smooth sailing, we should expect nothing in the way of surprises in the near future.

At the same time, the tech sector continues to feel good about itself, still drunk on Google profits, and never-ending Yahoo/Microsoft merger deal.

By Friday, I expect to be purchasing both XLF and QQQQ, the financial and Nasdaq ETF respectively.

Borrowing cheaply to fund investments - Pt. 3

The final piece of analysis for my cheap loan for investment idea is to consider a classic value-at-risk model. What is the worst case scenario, and could I handle it?

After paying out the 0.50% monthly interest, assuming the very worst, I would need a 28.8% return in the last month to have enough money to pay back the loan + fees and break even.

I think I can accept that. If I become super risk-adverse, I could generate about 2-3% return per month with the possibility of needing to shell out $2,000 at the end of 3 years to pay back the loan.

Borrowing cheaply to fund investments - Pt. 1

Yesterday I talked about the possibility of using the cheap loans banks have been offering to fund investments. Based on an offer of $8,500 for either a 6-month loan at 0.99% or a forever loan at 6%, with a 3% fee on each, here are the numbers:

Instead of accounting for the "forever" loan, I just assumed a 36-month loan. Taking into consideration the interest rate and fees, choice 1 is clearly the lower costing loan.

However, just because the dollar cost is lower doesn't mean it is actually better. The 36-month lower has a lower required return rate of 4.25% compared to a return rate of 6.78% for the 6-month loan. Risk is increased greatly whenever higher returns are required in a shortened time frame.

While either return rate is doable in a normal stock market, given the current economic environment, I am leaning toward a longer time horizon. The smaller per month payment also allows me to payout of my pocket earlier on, before I've started generating any real investment income.

Tomorrow, I will work out what I need to make in order to make this venture worthwhile.

Market Outlook for the Week

Well, all the interesting earnings reports are behind us. The markets really took a beating late last week, as companies across the board reported earnings below or only meeting expectations, which the street hated (the only bright spot being Google).

For me, it was a great time to buy more Nasdaq (QQQQ) calls options on the cheap. Right now, I have amassed the largest position I have ever taken in one equity, about 25% of my total funds. It is a massive bet, but I am betting that the market well view the market this week with new eyes, see plenty of buying opportunities, and price in a rate cut coming after all this negative economic news.

What do I need? I need the Nasdaq to go up about 5% from where it closed on Friday, and my options will do very well.

Go Nasdaq!

Future Plans

Yesterday, I was blogging about my career thoughts, and today I continue that topic. Many have been commenting about my lack of job experience and how a) I even got into a MBA school and b) why I went.

For me, the MBA seemed like an obvious choice. I wanted the liberal arts experience while studying economics and computer science, and then obtain a professional degree, ensuring I learned everything I could while I was still capable.

In the past two decades, most college graduates entered the work force for at least two years prior to going back, realizing they needed an advanced degree to both advance on the career path or to choose a totally different one. But before that, college straight to MBA was the norm. Waiting seemed odd, so maybe I'm just old fashioned!

Anyway, I've known since I found out it existed that I've wanted to be in asset management. But in order to get there, I need a lot of finance experience, and especially a stint in i-banking. My lack of experience prevented me from obtaining any associate-level job in an i-bank, so I went with corporate finance instead.

I figure, two years there, I can switch to a comparable senior associate-level work at an i-bank. In between, I have been talking with everyone about my interests and my market thoughts (including posting here). My parents recently presented me with an interesting
proposition:

$20K to invest in anyway I see fit, of which $10K is their money and $10K is technically a loan to me. We would split any profits/losses.

I think this could be a great opportunity to start my own track record, while feeling responsible about a "client's" money. At the same time, its always tough to accept money from the parents, in whatever form it comes.

Investment Ideas for the Young

So at work today, we had an interesting ad-hoc discussion about 401(k)s and long-term investing. A strategy that one of my finance professors had talked to me about surfaced from one of my coworkers. He (and my professor) suggested that for young investors looking to invest long-term, the best way is to put 100% into something that you really believe in and ride it out.

The idea is that for most large companies and volatile companies, the general trend is upward, but day to day you can expect huge swings, that does not match any stock index.

Take for instance the S&P 500 historical returns. Looking at the returns, here are the breakdowns by length of investment and simple annual return on investment (ROI):

1 Month: 4.33%, 51.96% ROI
3 Month: 3.07%, 12.28% ROI
6 Month: 7.58%, 15.16% ROI
1 Year: 13.11%, 13.11% ROI
5 Years: 37.65%, 3.77% ROI
10 Years: 84.99%, 8.50% ROI

As the investment length increases, the APY levels out to about 6.3%, which implies decreased riskiness but this level of return is also very low.

Now consider a big company like Exxon (XOM), which is constantly in the public eye, and hence has huge short-term volatility (adjusted for dividends) with ROI:

1 Month: 4.31%, 51.72% ROI
3 Month: 10.45%, 41.80% ROI
6 Month: 12.61%, 25.22% ROI
1 Year: 28.18%, 28.18% ROI
5 Years: 122.39%, 24.48% ROI
10 Years: 246.30%, 24.63% ROI

While the APYs are a bit misleading in the past 3 months due to earnings reports, you can see that the overall 10 year returns with simplified ROI show that the one investment is better than the stock index, effectively representing diversification.

This is something to consider for younger folks, but those that don't have AT LEAST 10 years to invest should definitely not try this.

Anonymous, where are you? OR How I Pick Stocks, Redux

The last two days have been big days for the blog. Plenty of people have come by to see the controversy. I'm kind of sad really. No one else has left any inflammatory remarks today.

This is a good opportunity however to add on to my previous post about picking stocks. In that post, I know that some people felt that I was incorrect in my assumptions, or in some way, was misleading poor sheep to the metaphorical slaughter that is trading.

However, this is not what I am doing. I just wanted to clarify a few myths about stocks, about how I approach stocks, and hopefully clear up any issues from my previous post.

1. In general, the stock market is rational, over the long run. Day to day, people tend to over react to bad news, and under react to good news. Plenty of studies have been done about that. I say this, because a lot of people believe the stock market is irrational, and have a belief that as the only rational investor/trader, they can make money off of that.
   
   
2. People do make money, but we have to separate "excess returns" from "normal returns". An excess return is getting back more than what everyone else is getting on average (normal returns). Say for instance, the Nasdaq went up 5% today. If your portfolio went up 6%, you've produced only 1% in excess returns. A lot of people like to point to their portfolio on big days, and say, "Look, 5%", but really what they are saying is "I'm average!"
   
   
3. There is no such thing as a "good" or "bad" stock. There is only stock that fit your risk profile and portfolio allocations, and those that don't.
   
   
4. Without knowing something extra, that the public doesn't know, about the market or stock, you can't obtain excess returns. Essentially, this is called semi-strong form market efficiency. Consider that 50% of the market is filled with people who are professional investors/traders. If there was such wild (irrational or irresponsible) pricing of stocks, why are any of these people still in there jobs?
   
   
5. That something "extra" is any comparative advantage you have versus other people in the market. Are you very versed in a certain industry? Are you great at reading financial statements and teasing out hidden issues? Maybe you know of a deal going down. All these are examples of an advantage that can lead to excess returns.

Finally, what I do provide is that "extra" edge in technology stocks. My undergraduate degree was in Computer Science and Economics, and I have always been interested in technology. Therefore, I have a comparative advantage in understanding technology trends, products, and research in development. It is with this knowledge, that I will recommend certain technology stocks.

For a more fundamental breakdown of the company, you have to consult readily available analyst reports. This is because (a) analyst reports rarely get fundamental breakdowns wrong, (b) there are plenty of analyst paid to do this, and (c) creating an analyst report is very time-consuming, and is counter to the purpose of my blog.

Great Week for the Market

With Bernake saying we're in the clear for inflation, oil prices falling, and corporate spending on the rise, it will be another great week for the stock market, especially for tech. If you're looking for something to buy, the sector is the place to go.

Check out: Google (GOOG), Sun Microsystems (SUNW), Yahoo (YHOO), Nortel (NT), Cisco(CSCO)

Disclaimer: Please make sure you understand the risk involved in buying stocks, and weigh your ability to accept loss before considering investing. There are no guarantees in life, and the stock market is no different.