On radar

High Dividend Yielders:
- MRK (Merck..Cramer recommended)..has double cash than debt has 5.3% yield. Has long history of dividends.
- I bought BMY..competitor of MRK..has double debt than cash but 7% yield
- Phillip Morris and Altria (MO)?
- GE: buffet bought stake. I have bought 100 shares by sellin $20 puts. ~6% yield.
- UTX (United technolgoies) - Cramer recommends. they raised dividends by 20% last week..that's an incredible move..they have been raising dividendds for last 15 years I guess..the CEO came on mad money...some 3.4 % yield.
- EER (Emerson) - 4.1% yield..53 years of dividend payments..great industrial play...cramer 11/11

Market Indices
- EEV: Ultrashort Emerging Markets
- SRS: Ultrashort real estate
- QID: Ultrashort Nasdaq 100
- DUG: Ultrashort Oil and Gas
- SPY: S&P 500 SPYDRs
- SDS: Ultrashort S&P 500

Oil Services and Refining Companies
COP - 3.6% yield and ex dividend date on 29th October.
NAT - 20% yield at least now..tanker company..Cramer recommended on 11/11. Dividend record 21st Nov.

Technology:
IBM - 2.2 yield and hasn't been baten down that much...very resilient..
AAPL:
GOOG:

Finance
GS

Back

SO much has happened since I wrote here last..market has crashed in a crazy fashion. And it has affected everyone..almost everyone! Oct 1 to Oct 10, Dow crashed by 2400 points or 2400/10800 = 22%!!. Lehmann Brothers going bankrupt really started this downfall. LEH went down as nobody agreed to buy (Fed couldn't force a deal like they did with Bear Stearns). Merryl Lynch followed and was swallowed by Bank of America. Goldman Sachs and Morgan Stanley, the only 2 surviving investment banks of the golden american financials era, became bank holding companies. Meaning they could now accept deposits like commercial banks. The regulation era is back...

Recipe for Poverty: Investing in market indices!

Everyone's heard of passive investing. If you just invest in a market index fund and let it ride, you will beat several active investors. A staggering 70-80% money managers can not beat the index (such as S&P 500, DJIA). This is what legendary investors like Peter Lynch, John Bogle also preached and practiced. They apprently did well. But something does not feel right. Here's a proof:

The chart shows S&P 500 index plotted over a 12 year time frame from 63 to 75 where investor basically didn't make a dime. If you invested in let's say SPY (S&P 500 index derivative) in 1963 and had a need to take your money out in 1975, your net return would be a big ZERO %.

Now 12 years is a very long time frame for anyone to get 0% return in a supposedly risky investoment like stocks (even if it is an index). This umbrella pattern (new term alert..Owner: moi) also repeats over medium term horizons like 4-5 years (chart below is S&P returns from 1997 to 2003).

Proponents of market indexing would rush and show you a similar chart from 1950 to 2008 where S&P shows a very healthy return that averages 7.2% annually.

Ok good. But man, I got no patience to wait 50+ years. And this then means only young investors should invest in a market index. Even then, there are life events that might force you to withdraw your money. So market indexing seems like a rip off at best. I would say 10-15 years is what the definition of long term should be. Anything above that is pretty boring in this age of instant gratification. In fact 10 years itself is pretty long in this CNBC era where new HOT stocks tips emerge every other minute.

So did Bogle and Lynch lie? Not really. That's probably why they recommended a diversified portfolio of index funds. It is still active investing albeit in a passive instrument. You still need to do the due diligence of picking appropriate market sectors for the current business cycle and then pick index funds (ETFs are pretty good for this) for those market sectors. And that's why they also teach you importance of rebalancing. When a phrama sector goes out of favor at the bottom of business cycle, you do not buy pharma ETFs. Here's a good business cycle and favorable sector map (Courtesy: Blog: Three Cents).

e.g. Pharma (# 3) is a poor sector at the Top. Financials (like now in 2008) is a good sector to invest in an early bull cycle.

So today in June -08, can you go and start buying Citi, JPMC, Merill right away? May be not. The issue is you don't know if this is the bottom and hence beginning of "Early bull" on the chart. Also, you are not sure who is headed the Bear Stearns way. Well, this is where Bogle's advice helps. For an average investor, best bet would be to start investing in an index of the financials (XLF). Start buying at dips and accumulating a core position to get ready for the upcoming upturn. There's always one coming! :)

Overall, market indexing is a rip off. Picking individual sector indices and timing the entry and exit according to business cycle above seems like a decent, at least not shoot yourself in the foot, strategy.

Value Investing

Graham, Buffet, Tweedy Brown and so many have practiced value investing for years and have done exceedingly well. So why doesn't everyone just copy it. Because, human beings naturally are born speculators. Gambling is probably in our blood. Stocks bring out that spinstinct (my own term: Speculative Instinct) very effectively. Hence most of the world becomes a momentum investor. Very few have the emotional discipline to stay in the game for the long term. Investing, more so than many things in the world, boils down to emotional discipline.

Cramerica

He may not always be right and may not be the sterotype "street" trader...but you learn from him: Jim Cramer:

1) PEG ratio between 1 and 2: good opportunity.
2) Dividend history: If stable growth in dividend % good sign. But sudden rise/fall in dividends - worrysome sign.
3) Insider Buying:
High Insider Buying + High Insider Shorts = good sign. Lot of insiders know upside potential. So they are selling high(short) and waiting to buy low.
High insider buying + Stock on latest new highs list = insiders buying despite highs is a gr8 sign.
High insider buying = by itself does not mean anything.
4) Stock on new High list: Wait for pullback and then get in if the stock is a good and safe company. Cramer believes that stocks continue the direction they are headed most of the times. (I don't buy that completely).
5) Trading Stocks: defensive way to make money.
Trading around a core position: works in volatile markets but can follow any time. Then buy one increment if stock goes Y amount down and sell one increment when goes same Y amount up. You do this over a period of time. This means trading around a core position although sounds boring. Cramer made ton of money by this!
6) Hot Stocks: small company(low market cap + high growth) stock...if there are at least 4 analysts covering, then stock run is done. This formula has worked!

Stock Options

Everyone is scared off Stock Options. They are supposed to be very risky and very complicated. That's true actually. But if you have some patience to read through the nomenclature and have some risk appetite, then options could be financially rewarding.

Selling Puts: Someone else can "Put" a stock into your account at the strike price. (Bullish..discount for stock buying)

Selling Calls: Someone else can "call" stock from your account forcibly. (Bearish..income source and tax puts)

Buying Calls: You buy right to own a stock (Bullish...)

Buying Puts: You buy right to sell a stock. (Bearish...insurance/protection)

Selling Puts to Own the Stock
1) Do your stock research first. Pick a good stock you would want to own.

2) Once you decide which stock to own, go to yahoo finance and look at the Option chain for that stock. Look at Puts.

3) Look at the current trading price of the stock and then the puts for that price.

4) Sell puts few contracts (depending on how much you can buy of that stock), each contract = 100 shares. Strike price you pick could be

• a) Such that Strike - premium <>
• b) If you don't want to own the stock right away, then pick Strike price - Premium <<<>

5) If you want to own the stock immly, pick immediate expiration, if not pick at least 6 months apart.

6) If you think stock could get hammered, buy some puts as insurance.

7) If put expires and does not get exercised, then you must decide if you want to sell another put or you want to directly buy the stock.

Once you own the stock: (at least 100 shares): Sell Calls to sell stock:

1) Start selling some calls to make monthly income.

2) Sell calls such that...Strike Price - Premium > Your stock purchase price.

3) If you want to sell immediately(don't want the call to be exercised), then you can choose Strike Price = your purchase price or even Strike - Premium = your purchase price. (no profit)

4) If you don't want to sell the stock immly, then select call such that Strike - Premium >>>>>your purchase price.

5) If you pick long expiration, then you may not be able to get monthly income. you might get a big lump sum once. That should depend on stock volatility. If stock trades within a small range (highly volatile) then you might want to sell calls monthly to make regular smooth income vs one time.

Risks:

Selling Puts: If underlying stock goes down, probability of exercise goes up. Hence if you don't want to own the stock, this is a risky strategy. Also, if you pick too high a strike price, you might own the stock for a much higher price that current price.

Selling Calls: If underlying stock goes up, value of the call goes down and probability of exercise goes up. If you don't already own the underlying stock, you could get in big trouble. One should always sell Covered Calls.

Watch List

High Dividend Appreciation Firms: AT&T Johnson and Johnson All State(?) Norfolk Southern? Bank of America, Nike, ConocoPhilips, Eli Lilly,Paychex, Avon Products
Other Watch Lists: Disney Verizon Apple Costco

Long Term vs Short Term Investing

Peter L Bernstein: Long term returns are more uncertain than short term despite the conventional wisdom that short term returns are more volatile.
e.g.$100 invested today could become $90 or $110 in 1 year if we say that 1 year time frame is very volatile and could produce returns from -10% to 10% (high std deviation). Now same $100 over a longer 15 year term could produce $207 for 5% returns and $417 for 10% returns. Thus long term, despite having small standard deviation compared to short term, results in a much larger "spread" in total $ returns. (20% spread in ST vs 200% in LT).
Now What?: To bring down the uncertainty over long term, focus on not only "stock price appreciation" but also on "income appreciation (dividends)". Dividends greatly reduce the uncertainty over long term.
e.g. $100 invested in a dividend paying stock in 1925 ,which let's assume had 0 price appreciation, would have produced higher annual returns upto 1965 (!!!!) compared to a high growth no dividend stock. Only after 1965, Price appreciation would take over Income appreciation!
So: morale of the story is, long term returns is a relative term depending on your time horizon. Whatever be the horizon, focusing on stocks that can pay you steadytream of dividends will help reduce the uncertainty invovled.
And: Another key point is, dividend yield will keep going up for you with every passing year.
e.g. if GE pays 5% dividend every year, then $100 invested today become $105 next year. Let's say stock appreciated to $105 at5% growth. Next year GE dividend will be 5% of $105, the then stock price. Your dividend yield is still based off of $100 you invested and hence is 10.25% next year (1.05*$105 = $110.25)! Think about this over a 10 year, 20 year time frame. The dividend yield appreciation combined with moderate price appreciation is a winning combination. One might think this is similar to a compound interest in a bank account. But no. In a bank account your base will remain $100 forever unless you reinvest the interest you receive every year. In our example, we are not reinvesting the $5 dividend we received in year 1. It's the price appreciation that really does the trick which in a bank account would never happen. The underlying asset of $100 will remain $100 if the interest is not reinvested.

Most recycled material

Steel is more recycled than 4 times (glass+plastic+ aluminum)! ...Surprising ha? But Steel stocks get dumped every time there is sign of recession. Besides, emerging coutnries dump a lot of cheap steel in US.

Pearls of Wisdom

Warren Buffet (Oracle of Omaha): Don't pay too much for any stock. P/E ratio, P/B ratio and ROE are critical indicators for Buffet. We pay for businesses we feel good about owning by tracking management performance and business performance over a long 5 -10 year horizon.
Jim Rogers: He invested in countries! Went against the tide and invested in Lebanon and made a killing. He suggested to carefully listen to media and TV. He suggests tricks to spot tops and bottoms. Tops: trees will keep growing up and up. Bottoms: media declaring 'stocks are dead'. Fortunes can be made by timing these tops and bottoms but it can be done. Note that all large bottoms and tops are alike. Look in history and you will see very similar patterns. At bottoms, many who have been in business for a long time will leave or diversify. At tops, companies with no experience will also crowd in. The key is not to be a market genius but a market observer and thinker.
Peter Lynch (Fidelity): Buy things close to your home. The edge you get from buying companies you know (such as company where you work, who you do daily business with, who your kids love eating at etc) is much higher than even most informed stock market investors. Lynch bought things like Taco Bell, ADP etc. He seemed to stay away from tech stocks. He ran the famous Fidelity Magellan fund.
John Bogle (Vanguard): Active investing is a fool's play. Use market indices to play the market. Use various sector indexes for diversification. Active investing
One more wise guy:
Stock market has ups and downs because investors exhibit irrational exhuberance (Alan Greenspan's term) on the way up and down. That's why if you play a contrarian...when market and everyone is saying up ..up and above, you start selling...when everyone is saying this is the worst market, don't get in ...you start buying. "If you want to be with the crowd, you need to be cautious. If you are going against it, you need to be bold". Learning to analyze market opinion from TV and Newspaper news and then taking an opposite view has worked great for him.
Henry Markovitz : Markets are efficient and every investor should try to buy portfolio on the efficient frontier which is consistent with his risk levels. It pays to follow mean variance optimized (MVO) portfolios.

Bear Market Over??

At Least Cramer thinks so....as of 24th March!

Key Redings

Investor's Business daily: good stock analysis although more focused on technical analysis.
Blog: Three Cents , Hingefire

Spotting Stock Bottoms and Tops

Taking a leaf out of Jim Cramer's book:

Spotting Stock Tops (time to sell):

1. Every analyst has buy rating on the stock. Somebody has to be able to bring the bearish sentiment. Let that be you.
2. When you feel you have made a lot of money in a stock and it has had a great rally, get circumspect and think of the top. No stock would keep going on and on in the upward direction. Very few analysts on street talk about tops...they don't want to. That's the behavioral bias...unrealistic optimism.
3. If you follow fundamental analysis and pick a stock with low PE and that stock rallies up and goes to become a high PE, may be it's time not to keep holding but to get off - at least some.
4. Monitor the entire sector and watch out for Competition. Competition can come from anywhere and can destroy stocks. People like Cramer spend an hour studying competition every week.
5. Accounting irregularities = Sell ....no matter what...no exceptions! Numbers are fraud..(option backdating is a compensation issue not an accounting issue..option backdating might be a sign to buy actually)
6. Overexpansion: acquisitions, too many store openings, too much growth that can't be managed. (key word: "Integration Problems")
7. Government Intervention

Spotting a bottom

1. market sentiment must be bad. Front page of NYTime (right top corner) has mail letters from people talking all negative.
2. Wendesdays - investor's intelligent survey of money managers. If there are too many bears there.
3. Mutual funds pulling out of market in a significant way
4. Big bottoms have a catalyst usually ..market sentiment in gutter....you get some bad news in the market that has widespread effect on market. (e.g days before Iraq war..uncertainty is not good for investors and hence market reaches a bottom)

Spotting Sector Rotations

Cyclical: Airlines, Auto, Raw Materials, Consumer Durables (washing machines),

Secular: utlities such as P&G and General Mills

When economy is growing, buy seculars and sell cyclicals. When economy is in gutter, buy cyclcial and sell seculars.

Earnings Revisions

Spot earnings revisions by analysts before they do. Read the news...follow suppliers. If Intel's doing well, AMAT should be expected to do well.