September Stock Portfolio

Somewhere along the line my brokerage decided to increase the Money Market Sweep Account interest rate for holding my cash.  I noticed that it began paying close to 5% after I had cashed out my Charles Schwab (NYSE: SCHW) and Archer Daniels Midland (NYSE: ADM) stocks.  This might be in response to the recession in order to create more liquidity for the credit market.

**Note**

A Sweep Account is an interest-bearing account for any uninvested cash that flows into your brokerage account from various sources. Cash is automatically swept daily into the Sweep Account, earning you interest. When you are ready to use this cash for trading or for cash management activities, the necessary cash is automatically pulled from the Sweep Account. 

Symbol	% of Assets	Description	Dividend Yield	Industry
CU	29.75	United Breweries Company, Inc.	6.83	Alcoholic Drinks
BRK.B	18.29	Berkshire Hathaway Inc.	0.00	Insurance
GOOG	8.58	Google, Inc.	0.00	Online Services
CSCO	4.93	Cisco Systems, Inc.	0.00	Data Networking
JOYG	4.94	Joy Global, Inc.	0.84	Construction Machinery
WMT	3.54	Wal-Mart Stores, Inc.	1.69	Discount Stores
JNJ	3.38	Johnson & Johnson	2.69	Drugs
PGH	10.42	Pengrowth Energy Trust	14.50	Oil & Gas
STKL	2.57	Sunopta, Inc.	0.00	Agriculture
PXD	1.67	Pioneer Natural Resources	0.47	Energy
CASH	11.88	Cash	5.01	Cash

Cashing Out

Cashing out can either mean you made money or lost money.  The point is you're trying to free up that cash for other potential investments.  Today I cashed out Charles Schwab (NYSE: SCHW) and Archer Daniels Midland (NYSE: ADM).

I bought Charles Schwab back in 2006 because the company was struggling with the current CEO David Pottruck in place.  Mr. Schwab himself stepped back into the role of CEO and re-established the company to be the finest and most trusted stock brokerage names around.  He is again stepping down as CEO and therefore his value to the company will leave with him.  I believe the stock price has achieved its intrinsic value of around 23 to 25 per share and with added competition from cheaper brokerages, it remains to be seen if Charles Schwab's new CEO Walter Bettinger will be triumphant in this new era of online trading.

Archer Daniels Midland is a classic example of holding on to a trend for a little bit too long.  I was riding the wave of ethanol production from corn and this stock was up roughly 40% for me at one time.  However, this company has taken some losses not only in demand for its products but also from pure speculation of alternative fuel developments.  I continued to hold and eventually lost my gains and even began losing on this stock after 2 years of holding.  It would have been better to have cashed out while ahead and applied the cash to other investment opportunities.

My July Stock portfolio had about 16% cash but my August Stock portfolio had only around 3% cash.  My dad always taught me to hold about 10% to 15% cash for emergency reasons so the sale of these 2 stocks now place my cash holdings into that range.  I'm fine holding the cash since my brokerage sweeps my cash into a money market fund that returns roughly 5% so doing nothing may be a safe play for now as we wait for the $700 billion bailout to pass. 

Should you buy a house?

My dad keeps asking me when I'm going to buy my own house. My answer is when I decide where exactly I'm going to settle for the rest of my life. Based on this Rent vs Buy Calculator, a modest Bay Area home selling for about $400k would never see a return over the next 30 years given the current market conditions. In fact according to Yale Economist Robert Shiller, the housing market has a chance to fall farther than the 30% drop experienced during the Great Depression (see chart above).

Not to pour salt in the wound, but the reason we are experiencing this current recession is because of all the foreclosures. Banks are closing down on Wall Street because they were loaning money out to people who were not qualified nor responsible enough to make the required mortgage payments. The idea of "flipping" a house instead of owning it became a get-rich-quick scheme that never reached fruition for many. The huge spike you see from the chart above clearly shows artificially inflated gain from housing prices, which means housing prices are overvalued and probably have a long ways to drop before it reaches its true value.

So sorry dad, but I'm not buying a house anytime soon.

How 401k saves you money

I received a performance bonus of $1000 from my job this week.  Because of the simplicity of the numbers, it allowed me to see how my 401k actually increases the amount of cash I keep instead of losing it to Uncle Sam.

I contribute 15% of my income to my 401k, which means I get to subtract out $150 from the $1000 bonus BEFORE taxes.  My income is then taxed at 40% and the remaining amount is what I take home.

YES 401k

$1000 x 15% = $150 -> 401k 

$1000 - $150 = $850 (decreased income subject to tax)

$850 x 40% = $340 -> Uncle Sam

$850 - $340 = $510 -> my pocket

Total Cash I keep -> $510 + $150 = $660

Now if I had elected not to contribute to my 401k, the entire $1000 is now subject to the 40% income tax and I would be losing 6% more to Uncle Sam.

NO 401k

$1000 x 40% = $400 -> Uncle Sam

Total Cash I keep -> $1000 - $400 = $600

($660 - $600)/$1000 = 6%

I dedicate this posting to my co-workers and friends, who beleive they are taking home more spending cash by not contributing to their 401k but are actually losing money to Uncle Sam.  Help me help you! Don't give your money to Uncle Sam, give it to your 401k.

"A penny saved is a penny earned." -- Benjamin Franklin

"Help me help you." -- Jerry Maguire

**NOTE**

When you finally do cash out your 401k, you will be taxed at a much lower rate than 40%.  The rate you will be taxed at is the same rate you are taxed for holding a stock for 1 year, which is generally about 20%.  A savings of approximately half on income tax; all the while your 401k cash is growing in a compounding interest account for the next 20+ years.

Selling Short Explained

The other day I was IM'ing with a friend about selling short. We were discussing how I thought AIG, Goldman Sachs, and Morgan Stanley would drop after the news of Lehman Brothers going bankrupt. What I should have done was explain selling short in a previous blog post about my first and last experience of selling short in the stock market. So I'll do that now.

So what exactly is selling short a stock? It's making making money when a stock price goes down. The way it works is you borrow shares from your stock brokerage and you immediately sell the stock to gain cash, or "sell short". You then monitor the stock and decide when you want to buy it back (hopefully at a cheaper price), which is called "buy to cover". If you were successful at buying back the stock at a cheaper price, you keep the difference in price as profit.

For example, AIG stock was at $15 per share on Monday 9/15/2008. I "sell short" 2 shares of AIG stock on Monday from my stock brokerage and now have $30 cash ($15/share of AIG stock multiplied by 2). With my $30 cash, I buy back 2 shares of AIG on Wednesday 9/17/2008, which happen to be at only $2 per share. Doing a little math you can see that I only had to spend $4 to buy back 2 shares of AIG on Wednesday therefore profiting $26.

Joy Global (NASDAQ: JOYG)

Today I doubled my investment in Joy Global (NASDAQ: JOYG), which manufactures and services mining equipment for the extraction of coal, copper, iron ore, oil sands, and other minerals. Its stock price was recently depressed because of one stock analyst Terry Darling from Goldman Sachs, who believes JOYG's "operating performance continues to depress" and missed HIS earnings estimate. However, JOYG's earnings beat the industry consensus estimates by $0.15 with 3rd quater net income up 55 percent! This is a great example of how "professionals" can be wrong at picking stocks as well. The last time I checked, we still need to mine for coal, iron, copper, and even diamonds! And with added demand from emerging markets China and India, as evidenced with JOYG's recent acquisition of China's Wuxi Shengda for $22 million, I really don't see where the slow down of mining is going to occur.

This company believes in itself and cares about its investors by agreeing to repurchase $1 billion of its shares before the end of the year. What is repurchasing? As quoted from the Forbes article, "Repurchasing stock takes a company's shares out of circulation, boosting the value of existing shares and fattening profits measured per-share. Companies usually repurchase shares when they feel their stock is undervalued." Also this stock pays a dividend of $0.175 per share on a quarterly basis.

Tell me again Terry Darling, what exactly is wrong with this stock?

Be the bank!

In the midst of the current financial crisis comes a new investment vehicle. It's Peer-to-Peer (P2P) money loans, where you can literally loan money like a bank does to strangers. Featured on CNBC, a website called Zopa.com has created a process where investors can easily buy a Zopa Certificate of Deposit (CD's) and then decide who receives help by using some of the return money to aid borrowers repay their unsecured loans.

As a borrower, you simply sign up for an account and post your "Facebook" type of profile and your reason for the loan, which is usually a personal story. Based on the credit score, the borrower receives an unsecured loan at a competitive interest rate and then hopefully receives help from investors, who get to choose who they would like their return money to help which reduces the total amount of the loan + interest.

As a lender, you get a nation-leading, guaranteed & insured 1 year return (3.75% which is slightly higher than the national average of 3.1%) from the Zopa CD and a chance to choose who your money is helping. A lender can feel good about knowing that his/her money is helping a medical student pay back his school loans, or a mother of 2 start a baking company.

*NOTE*
There are other P2P websites like Prosper.com, which allow you to actually lend money directly to a borrower at the winning bid's interest rate however, this lending model exposes the lender to possible fraudulent loans and does not gaurantee the safety of your money the way Zopa.com does by using CD's.

School's for fools (sorta)

I found this article from the New York Times titled "Bye, Bye B-School" that uses Edward (Eddie) Lampert as an example of a young successful hedge fund manager, who achieved success without an M.B.A. degree. I think Richard Schmalenese, who was the dean of the M.I.T. Sloan School of Management, said it best:
“I don’t think you will see M.B.A.’s less represented in executive suites, but you may see M.B.A.’s less represented in the lists of the world’s richest people,”

I also found an article from SmartMoney.com titled "10 Things Millionaires Won't Tell You" that points out this interesting fact:
"...the median college grade point average for millionaires is 2.9, and the average SAT score is 1190 — hardly Harvard material. In fact, 59 percent of millionaires attended a state college or university..."

The point I'm trying to make here is anybody can achieve financial success. Attending prestigious schools or getting good grades doesn't necessarily equate to instant wealth. You have to invest the time to research your investments as information and trends are always changing. School can only teach you so much, but you have to take the initiative to take what you've learned and apply it to your investments.