Investing or Gambling?

Today I read an article on CNN Money that was titled "Dumbest moments in business 2009".  Slide 9 reminded me of a time when a colleague asked for my opinion about buying GM stock.

My response was, "Sure if you want to gamble and lose your money."

He went ahead and invested anyways thinking his money would quadruple in a matter of days. According to slide 9, it turns out that he wasn't the only person who thought gambling on GM stock would pay off.

I guess the day-traders created from the dot-com era still live!

Netflix Executes

When I found out Netflix was beginning to transition its business to include a streaming model (Feb 2009), I knew this company was on the forefront of pioneering the next revolution to Home Movie viewing. Ignoring Oppenheimer's "Underperform " rating on Netflix , what I saw was a company that executes.

Netflix has been growing profitably and comfortably since its founding in 1997. I don't believe they have ever reported negative earnings and their business model is very simple to understand. They rent movies over the internet which caters quite nicely to the vastly growing idea (especially with younger generations) of living on the internet.

Netflix Total Cash: $254M

Netflix Total Debt: $38M

As a side note, I always ignore bank Upgrade/Downgrades since I don't really believe they know anything except how to confuse you with fancy formulas and over-analyzed finance models. It's easy to jump on the bandwagon (Oct 23, 2009 after Netflix earnings) once a stock rises in price as Oppenheimer has. It was only back in July 2009 when Oppenheimer downgraded Netflix (NASDAQ: NFLX).

As Katy Perry sings it: Shut-up and put your money where your mouth is Oppenheimer. I did back in my August portfolio.

Deceiving Recovery

I'm sure all would agree that this year has been a recovery if you just look at percent gain vs percent loss. But being an engineering major, I need to see the numbers from the bottom line in terms of cash (total loss vs total gain). What I found was quite interesting as percents can be deceiving:

Jan 1 to Dec 31, 2008 I had a 401k loss of 15%
Jan 1 to Oct 8, 2009 I have a 401k gain of 39%

At first one may think..."Wow I totally made up all the cash I lost from last year!"

Now let's take a look at the bottom line...

Jan 1, 2008 401k value: $122k
Dec 31, 2008 401k value: $104k
2008 Contribution: $22k
Gains/Losses from investing: ($40k)
Bottom Line Formula = (104-122)/122 = -15% loss

Jan 1, 2009 401k value: $104k
Oct 8, 2009 401k value: $145k
2009 Contribution (thus far): $18k
Gains/Losses from investing: $23k
Bottom Line Formula = (145-104)/104 = 39% gain

The reason for this discrepancy is in the numbers:

• For every $1 invested in 2008, I lost $2.
• But for every $1 invested in 2009, I gained back only $1.

So my bottom line return from investments in 2009 ($23k gain) is still behind what I lost in 2008 ($40k loss).

I don't consider this a recovery yet, do you?

August Portfolio

As you can see, I've allocated over 50% of my investments into China companies simply because I believe there is a shift in economic power.

Symbol	% of Assets	Description	Dividend Yield	Industry
PTR	28.23	Petrochina	3.30	Integrated Oil & Gas
BRK.B	7.84	Berkshire Hathaway Inc.	0.00	Insurance
SBUX	8.87	Starbucks Corp.	0.00	Specialty Eateries
N	8.81	NetSuite, Inc.	0.00	Business Software & Services
NFLX	8.09	Netflix, Inc.	0.00	Music & Video Stores
1211:HKG	28.57	BYD, Inc.	0.00	Batteries
CASH	9.59	Cash	2.01	Cash

Starbucks Addicts

In my opinion, there are 3 types of addictions people have in this world: drugs, alcohol, and coffee from Starbucks.

I initially made my purchase of Starbucks in December 2008 because I learned that the original founder, Howard Shultz, was returning to the company as CEO. This was the same strategy that worked with my Schwab (NYSE:SCHW) investment when Charles Schwab himself returned to the helm.

So Mr. Shultz immediately came back with guns blazing: shutting down around 600 underperforming stores, reducing staff, adding new drinks (my personal favorite is the Chocolate-Banana Vivanno), and buying new coffee technology like the Clover which is a fancy coffee maker designed by Stanford Engineers. Today I'm still sitting on my Starbucks (NYSE: SBUX) investment and will continue to be "married" to the company, as Warren Buffet likes to say, until Mr. Shultz decides its time to step down once again.

Annual Berkshire Hathaway Shareholders Meeting 2009

Making it out to this year's annual Berkshire Hathaway Annual Shareholders Meeting was such a thrill. Seeing Warren Buffet in person was definitely surreal and something that I can now check-off my "Bucket List".

Warren Buffet certainly has a large and enthusiastic following as shareholders even camped outside the Quest Center the night before to assure themselves a seat close to the stage where Warren Buffet and his business partner Charlie Munger would be speaking. Finding a seat anywhere proved to be quite challenging as people were saving seats and being very rude about it too. Buffet needs to make a rule that if your not present in your seat, then don't give anybody heat for taking it. Luckily they had overflow rooms so we could still listen and watch the meeting instead of starting fights with pretentious shareholders.

Buffet gave his usual witty and clever "Buffet-isms" in answering questions about Bershire businesses and the dire economy while Charlie would plug in his 2-cents afterwards. Some highlights I picked up on were:

• There is an obvious surplus in homes and therefore a leveling off period will take some time. However, even after the housing economy levels off, there's no way to predict where it will go from there. Though Charlie did say in a closing statement that if he was young and can afford to buy a home now, its a very attractive time with low prices and low interest rates.
• I don't think Warren particularly finds MBA degrees very valuable. Throughout his answers he would often comment about how MBA schools overanalyze things. He and Charlie both beleive that value investing should come from very obvious clues and not from complicated formulas. Warren also mentioned that if he were to open a school, he would only have 2 classes: learning the value of a business and reading trends in the market. (I sorta forget the 2nd one but I think it was predicting the market or something along those lines.)
• Warren believes Wells Fargo Bank is clearly a superior bank with the smartest management. Charlie was particularly adamant about only investing in Wells Fargo Bank (NYSE: WFC) and not any other bank.
• Charlie believes China is doing exactly the right things in becoming a more powerful economy. Hoarding cash and buying US Bonds with long term returns. Warren was a little on the fence in this regard but he does agree that China's fiscal policy is more efficient than the US. Obviously Warren believes in China businesses as demonstrated from his previous investment in Oil Company PetroChina (NYSE: PTR) and current investment Battery Maker BYD (HKSE: 1211).

CRM Industry Numbers

1993 Siebel founded

1995 Revenue $8 million

1996 Revenue $39 million

1997 Revenue $120 million ($41 million Profit)

1998 Revenue $391.5 million ($55.7 million Profit)

1999 Revenue $790.9 million ($122.1 million Profit)

2000 $1 billion Revenue

2002 Revenue $? billion ($(loss) billion Profit)

2003 Revenue $1.35 billion ($(loss) billion Profit)

2004 Revenue $1.34 billion ($110.7 million Profit)

2005 Oracle buys Siebel $5.8 billion

1972 SAP founded

2004 Revenue $9.541 billion ($1.659 billion Profit)

2005 Revenue $10.773 billion ($1.895 billion Profit)

2006 Revenue $11.892 billion ($2.369 billion Profit)

2007 Revenue $12.967 billion ($2.430 billion Profit)

2008 Revenue $14.644 billion ($2.390 billion Profit)

1999 Salesforce.com founded

2004 Revenue $176 million ($7.346 million Profit)

2005Revenue $310 million ($28.474 million Profit)

2006 Revenue $497 million ($0.481 million Profit)

2007 Revenue $749 million ($18.356 million Profit)

2008 Revenue $1,077 million ($43.4 million Profit)

1998 Netsuite founded

2004 Revenue $16.5 million (? million Profit)

2004 Revenue $17.684 million ($-28.555 million Profit)

2005 Revenue $36.356 million ($-57.664 million Profit)

2006 Revenue $67.202 million ($-35.722 million Profit)

2007 Revenue $108.541 million ($-23.906 million Profit)

2008 Revenue $152.476 million ($-15.864 million Profit)

Netsuite (NYSE: N) is the corporate Facebook.com

People are quite dependent on Facebook.com for maintaining their "social status" among their friends.  Among the many features Facebook.com has to offer: it tracks where your friends are located at the moment, stores and shares pictures where people can tag and link relationships, and maintains up-to-date contact information for those on your friends list.  The advantage of having your information in a cloud is that you don't need to access your computer at all, but simply an internet browser to access Facebook.com.  Another advantage is you don't have to install any software and maintain it on your computer, which can be troublesome especially with dysfunctional OS updates and poor file management.  (Some of my friends/co-workers have the worst computers with buggy applications and messy desktops!)

What if this application concept could be applied to the corporate world in terms of how companies track their relationships with customers?  This is what Customer Relation Management (CRM) software maker Netsuite (NYSE: N) does.  In addition to CRM capabilities, Netsuite provides Accounting/Enterprise Resource Planning (ERP) and e-commerce software that enable businesses to manage their critical back-office, front-office, and Web operations in a single application.  This new "cloud" computing model streamlines a companies operations simply because a business can now concentrate solely on its sales instead of spending precious profit on maintaining its own applications in house which can become costly and outdated.  

So how is Netsuite as an investment?  =)

Netsuite's competitor, Salesforce.com, already has a running start in the cloud computing CRM industry being named on Forbes 25 Fastest Growing Tech Companies.  Salesforce.com went IPO back in 2004, now boasts a Market Cap of $3.28B with an EPS of 0.30 (not to mention $300M in cash with $0 debt).  I beleive this market is big enough for 2 players (just look at Coke vs Pepsi or Yahoo vs Google) and Netsuite has room to grow.  Netsuite went IPO only last year (Dec 2007) and currently has a Market Cap of $590M.  It recently reported its first profitable quarter of 0.01 EPS and also has cash ($123M) with no debt.  This clearly tells me that both companies keep a clean accounting sheet and understand how to make money.  Only time will tell if Netsuite can possibly catch Salesforce.com and maybe surpass it!

Carlos Slim -- World's Richest Man 2009

Who is the world's richest man?  You were close if you thought Warren Buffet or Bill Gates.  It's actually a man named Carlos Slim, whose net worth is over $60 billion mostly made from his investments in Mexican telecom, Telmex, which owns 90% of the telephone lines, and Telcel, which operates 80% of the cell phones.

Recent recession woes have left Warren Buffet's Berkshire portfolio in a world of hurt.  Particularly his larger holdings of American Express (down 64% in 2008) and Wells Fargo (down 50% in 2008) which respectively make up 5% and 10% of Berkshire's portfolio.  Bill Gates' net worth continues to drop along with shares of Microsoft which are trading at levels not seen since 12 years ago.  

Like Buffet, Carlos Slim likes to buy distressed companies.  In 1997, he bought 3% of Apple stock for $17/share just after Steve Jobs returned as CEO and was on board when Apple returned to dominance.  Carlos Slim is at it again dropping $150 million into distressed bank Citigroup and $250 million into debt-ridden newspaper New York Times.  Both of these stocks have been trading below $6 recently so only time will tell if these investments will pay off.  

And yes I do own Citigroup at $6/share, but I'm still looking for a good reason to buy New York Times...

Calvin and Hobbes depiction of Financial Crisis

A clever depiction of the Financial Crisis from a Calvin and Hobbes comic.