Tuesday, May 29, 2007

What You Can Do Today To Be Rich in the Future

I was looking in the archives of one of my favorite blogs, The Simple Dollar, and I came across a great post detailing 18 tips that can save the average person over $4,000 a year! A great deal of these suggestions are new to me so I thought I would share the link.

To take this post one step furthur, I calcuated the benefits of living by these tips and depositing the average savings into a Roth IRA retirement account and assumed a 10% return on the account. The results are outstanding:

You would have almost $2,607,000 in your account when you retire at 65. This value is created simply by depositing the money you saved through the years.

Saturday, May 26, 2007

What to Do With The Rest of the Money That Is Not in Stocks

Throughout history stocks have certainly proved to be the best investment vehicle, performaning significantly higher than other assets. While I strongly suggest that readers implement the 120 Solution when allocating their investments (subtract your age from 120 and you get what percent of your avaiable capital should be in stocks), I understand that some money should be saved for emergency and liquidity needs. Now it is time to ask yourself, are you really making that money work?

Online savings accounts are a great way to make this money work. I current have an ING Direct savings account that yields around 4.5%. I was actually given a $25 promotion so the account has actually yielded me around 6.5% last year. The account is great because it allows for automated transfers between my accounts. I know that every month I have to pay rent. I have simply set ING transfer the rent amount to my checking account (yields 1% a year) a few days before rent is due and then write the check. For small account values like mine, this process only really earns me $40 more a year, but 40 bones is 40 bones! This account also encourages me not to spend money! I usually only have about $150 in my checking account, the rest is in my ING savings account. The automatic transfers force me to be frugal by reducing impulse purchases. The very act of manually going to ING's site and withdrawing the money before I spend it usually takes too much effort, so I end up not buying the product. ING also offers a paper checking account with a lower yield, but if your interested in the savings account, feel free to post a comment and i'll share the $25 promotion link.

There are an array of other products offering higher yields than the typical savings accounts. I know that HSBC offers a higher rate than ING, but I calculated that the $25 promotion was a better deal for me. Another interesting account is Schwab's new checking account. This account offers traditional paper checking as well as 4.25% annual yield. I would personally be very interested in this account but I am concerned about the impact on my credit score from opening too many accounts soon after I opened up my ING account.

In short, individuals should really consider these higher rates of return. Given that inflation is sitting around 3% a year, you are actually losing a significant amount of money on those accounts that are giving you 1% or less.

Friday, May 25, 2007

Ahhh The Hedge Fund...

Many of you may have read my 24 Goals in 240 Days post detailing my desire to build my Hedge Fund's account value. Wait, Hedge Fund? That's right. One of my career objectives is managing my own alternative investment firm so I thought now would be the time to go ahead and make that career dream a reality... well sort of.

My friend and I have recently filled out paperwork to open a new account with our brokerage firm. This account will be the temporary location of the new fund. I figured opening up the account now would allow the fund to establish a record of performance so we will be able to use that as a pitch when we actively seek investors. The fund will utilize the same investment vehicles as any typical hedge fund like the ability to short securities and utilize derivatives and other forms of leverage for enhanced returns. While the brokerage is finalizing the account set-up, my friend and I are working on detailing the specifics of the fund including the overall strategy and asset allocation, risk profile, goals and objectives, promotion and investor commitments.

I will keep readers updated on the progress of the fund, but for now I will simply share the layout of the webpage I plan to maintain in order to facilitate interest in the fund.

Wednesday, May 23, 2007

Book Review: Come Into My Trading Room: A Complete Guide to Trading

Wow. I cannot believe how much I enjoyed this book. Before I detail how great this book is, I think it is important to note the type of person I am. I am a college student hungry to learn how to maximize my investment account values and overall net worth. I also get very excited learning about new investment strategies and vehicles. If you match these characteristics, I encourage you to finish reading this post and start reading Dr. Alexander Elder’s Come Into My Trading Room.

So I definitely took three full pages of typed notes and created a whole Excel workbook with four worksheets all in an effort to better replicate Elder’s strategies. I do not consider myself to be a big note taker, so be prepared to get a lot from this book. The book is basically divided into three parts: characteristics of a trader and an introduction to the trading game, money management, and technical analysis techniques.

Personal Takeaways:
Elder details the typical make-up of a trader and the different environments traders operate in. He explains that there no such thing as a typical trader, but often times successful traders have muted emotions, above-average mental math skills, patience, and a drive to make a lot of money. If you feel you meet the mold then Elder encourages the reader to read on as he describes the types of markets, where to trade, and the time frames one should trade. Once you select your ideal trader make-up you are ready to learn about technical analysis and making money on the psychology of investing.

The technical analysis section is certainly provides the deepest content by informing readers about indicators and oscillators as well as offering strategies for trading once readers understand the basics. I could really go on forever, but I will just give you a taste of what Elder offers. Elder suggest that before trading do the following: identify your favorite time frame and move to the next broad frame (if you like weekly trading, move to monthly charts) and use the indicators to locate a trend, move back to the intermediate time frame and wait for an entry point based on your oscillators, set your profit target and exit strategy, and set what you are willing to loss on the trade by setting a stop.

The final section discusses money management. The core of this section highlights the importance of sticking to your main goal of maximizing your account value. Elder preaches that an individual should never risk more than two percent of his/her account value on a trade and never have more than six percent of the account value at risk during a given month. Traders should also keep diligent records helping traders notice where they are succeeding and which strategies need to be modified.

I recommend investors interested in active portfolio management seriously consider reading this book with pen and notebook. The book has help diversify my investment strategy and I am eager to use more technical analysis in my quest for wealth.

Book Review: All About Index Funds: The Easy Way to Get Started

All About Index Funds: The Easy Way to Get Started by Richard A. Ferri was the third book I read this summer, and I must say, it was a bit of a laggard compared to the other two. I am not very to motivated to write about this book because readers could find the same information on Wikipedia and other common investment sites, but I write on in an effort to convince readers to seek other pieces of financial literature.

The book has several sections that introduce mutual and index funds, offers some notes about asset allocation with these funds, evaluates fund performance, the array of different types of funds, and the future of these investment vehicles.

What a typical investor may gain from this book is a better understanding of the difference between mutual and index funds. A mutual fund is run by a manager who sticks to an asset selection strategy, as specified in the fund's prospectus, and is evaluated on the fund’s overall performance. An index fund tracks an index, or collection of a particular set of securities, and is evaluated on the accuracy of imitating that index’s returns. An investor who wants to target a specific group of stocks may want to look into investing in an index fund who tracks that particular group of stocks. If an investor is looking toward achieving above average returns, may look into investing in a speculative mutual fund.

Personal Takeaways:
I think the most important takeaways from this book relate to asset allocation and fund fees. An investor should use asset allocation to achieve his/her return goal. This investor could use a variety of funds to achieve his/her unique asset mix ideal for the investor's target return. In addition to using allocation to address investment goals, an investor should consider fees when choosing an investment vehicle. Index funds are almost always cheaper than mutual funds, which means that they actually give you better overall returns (on average). Many times, these funds are also more tax friendly, another important part of assessing your overall returns. Still, these benefits are highlighted all over the web; no need to read these chapters to uncover potential secrets.

I think a potential financial planner may enjoy this book if he/she does not have his/her facts straight already, but my overall opinion on the book directly correlates with my positioning of this post. Readers can appreciate that I strategically wrote this review on the third book I read this summer before the review I am going to write for the second book I read. This position will allow readers to simply pass over this post, much like they should pass on this book.

Thursday, May 17, 2007

New Blog!

I have begun to trade based on my recent education in technical analysis. All traders agree that good record keeping is one of the most important keys to success. So I decided to keep my trade records very public, and record them in my new blog: Rick's Proprietary Trading Log.

As I stated in my new blog's header, the purpose of blog is to help document my technical stock selections. My plan is to record the trade in this blog right after I execute the buy or sell order. I have developed a comprehensive excel spreadsheet that tracks my trades as well. I will also post any entries or modifications to my spreadsheet as well.

For each order I plan to write the following in this blog:

  1. Overview of the pattern created by the stock
  2. Decision to go long/short
  3. Strategies for entering the trade
  4. Strategies for exiting the trade

Most of my trade decisions will be derived from weekly trends and executed based on daily opportunities. That is my favorite time frame. If you wish to follow the same strategies but want to use a different time frame, simply draw out (or in) the same strategies to your desired time frame.

Friday, May 11, 2007

Some Thoughts for Students Entering the Job Market

As some of you may already know, I am going to be a Senior this fall at the University of Michigan, Ross School of Business. While technically my concentration is in Finance, I have had really great experiences with my current summer employer, Electronic Data Systems (EDS). This summer is my fourth summer working a project management role with the technical consulting firm and I really enjoy the leadership opportunities that a full time position would offer.

I thought I would use some nifty calculators to find the financial benefits of a full-time Project Management job with EDS in the Detroit area, verses working as a Financial Analyst in a big city. I used CNN's Cost of Living calculator to analyze the expenses associated with living in a particular city. After speaking with some of my co-workers, they suggested that I could maybe get a starting salary of almost $70,000 in Detroit. For my calculations I assumed a salary of $65,000 with a 5% bonus, totaling a true salary of $68,250. The calculations below suggest I would need a salary of at least $137,085.56 in New York City, and $90,761.44 in Boston, to maintain the same lifestyle as offered by the EDS position in Detroit.

I also explored what my true hourly wage would be given my two potential career paths: a Financial Analyst of some sort and a IT project manager. I used instacalc's Salary to Hourly Wage calculator to find how much I would need to make as a Financial Analyst to match the hourly wage offered from the Project Management position. I used the same base salary and bonus for the Project Management wage and from my conversations with co-workers, I learned that the typical workweek is 40 hours and entry level positions are allowed three weeks paid vacation. After some brief research on a typical Financial Analyst position, I discovered that these positions usually only get two weeks or so of paid vacation and average 60-hour workweeks. The data also suggests the average bonus for these Analysts is a bit higher, let's say 10%. From the calculator I found that in order for the Analyst to match the hourly wage of the Project Manager, the Analyst would need a base salary of $95,000!

Have fun with these calculators.

I am Selling Some CHCG at These Levels

In case anyone bought into CHCG a few days ago, I would suggest taking some profit at these current prices. I managed to sell about 40% of my stake at $7.20/share, but anything about seven dollars is a nice profit (almost 15%).
Congrats to all and good luck longs!

Thursday, May 10, 2007

A Recap of Prior Plays

I felt obligated to share the performance of the trades I proposed on this blog. I went all the way back to my November posts (which apparently I was doing my best work) and found how each pick turned out.
The table below shows the performance of my November 10th picks. I simply assumed the investor would have bought shares at the closing price on November 10th and sold the stock after the week was over, sometime around November 15th.

The table below shows the success of my IPO evaluation on November 15th. For these stocks, I assumed the investor initiated a market order when these stocks started trading and sold the stocks at the end of the day.

The table below highlights my most recent round of earnings plays. Like all earnings plays, I assumed the investor bought the stock sometime after the post or around the close before the earnings report and sold the stock the next day sometime around the close.

The last table is my recently recommended "technical analysis" stock. I will try to add more of these as I learn more about TA.

You can interpret these tables however you like, just thought I would throw them out there.

Monday, May 07, 2007

I Like Marvel Going into Earnings

There is nothing wrong with chasing momemtom, so I am chasing Marvel (MVL) going into the company's earnings report on Tuesday. The stock is slightly off its 52 week high and has a slightly higher P/E ratio compared to its competitors, but the potential earnings this new Spiderman movie could bring in is amazing. This weekend Spiderman became the highest grossing opening-weekend movie ever. Marvel not only makes money from the movie, but also from the action figures, clothing and trading cards. All of these outlets translate into Marvel royalities. Earnings Whispers expects a four cent beat, but I can only suspect that Marvel will raise its guidance with the recent success of Spidey.

I am looking beyond the fundamentals and trading on a good feeling. Hope this works out.

I'm Buying CHCG at These Levels

I am currently reading a book that suggests traders follow five to ten stocks and understand how they swing over time. One of the stocks that I have been following and trading since October is China 3C Group (CHCG.OB), an electronics retailer in China. The stock recently had a significant run-up to $7.50 and it appears that several shareholders have been profit taking over the last several weeks. The stock is currently trading around $6.10, still above its 50, 100, 200 day moving averages.

I think I have made almost 15 trades on this stock and I confident that this stock has room to run. I do not pretend to know anything about technical analysis, but I usually buy this stock after three or four consecutive down sessions. I think this strategy has worked because the stock has great fundamentals and growth prospects. The company stated in its last earnings release that they would announce several more store openings sometime in the second quarter. I noticed that anytime a press release comes out on this company more analyst cover the stock and start to appreciate how great the growth prospects are.
There is a good chance that this stock may retreat a bit more from these levels, but I am confident that as soon as the company releases some news, the stock will soar back to the 7s. Good luck!

Sunday, May 06, 2007

Financial Calculators Galore

I stumbled across yet another financial calculator website today. Hugh's Mortgage and Financial Calculators is a great site offering traditional finance calculators (IRA and house one can afford), as well as several really unique calculators (sack lunch savings, gas savings and beverage savings). After picking through Hugh's site a bit, I thought I would share other great financial calculators I found on the web:

I ran the beverage savings calculator and found that I could save $208/year and $3,315 after 10 years if I order water every time I go out to eat, assuming that my beverage usually costs $2 and I go out to eat twice a week. I also ran the retirement savings now vs. later and found that a person my age would have to pay $254 more each year to have the same ending balance if they choose to wait a year to fund a retirement account, assuming a $2,500/year contribution.

Feel free to share your favorite calculators...

24 Goals to Accomplish in 240 Days

After reading the simple dollar's 101 Goals in 1001 Days post I felt inspired to document my own list of goals. I used Trent's same strategy of establishing specific, quantitative goals that may be poised for failure. I was a little impatient with Trent's time frame, so I made these goals good until the end of the year. I plan to write an update on these goals every couple of months or so. I have italicized all finance-related goals.
  1. Make the maximum contribution to Roth IRA by July 4th ($0/$4,000)
  2. Successful open up Hedge Fund account by June
  3. Hedge Fund account value greater than or equal to $10,000 by August ($0/$10,000)
  4. Hedge Fund account value greater than or equal to $20,000 by January ($0/$20,000)
  5. Roth IRA account greater than or equal to $9,000 by January ($3,500/$9,000)
  6. Have 150 blog posts by December (25/150)
  7. Create Fund website by July 4th
  8. Read five books by August (1/5)
  9. Create two more portfolio’s in my Virtual Stock Exchange league (0/2)
  10. Do 75 push-ups without taking a break (40/75)
  11. Run 2 miles in 12 minutes
  12. Increase my net worth by 80% this year (30%/80%)
  13. Play a set of tennis without double faulting
  14. Achieve Certified Associate in Project Management (CAPM) certification
  15. Secure a full-time job
  16. Convince five people to start investing (0/5)
  17. Establish and record 500 phone contracts (120/500)
  18. Establish and record 1000 email contacts (200/1000)
  19. Learn how to drive a manual transmission
  20. Achieve 1000 lifetime trades (200/1000)
  21. Complete my portfolio management spreadsheet and submit to sourceforge.net
  22. Attend a University of Michigan basketball game for free
  23. Master double-digit multiplication and division
  24. Give blood

I encourage all of my readers to set their own goals and let me know how they go. Remember, be specific with these goals and do not be afraid to set yourself up for failure.

Thursday, May 03, 2007

Buying Companies You Like

I watched an interesting program Monday night on CNBC detailing how four successful entrepreneurs made their money. Phil Town was one of those entrepreneurs and he made his money in stocks. Phil suggests that individuals invest in companies that make products that they like. He reinforced this point by stating that if a particular audience member bought shares in the company that made her purse (Coach) several years go, she would have more than tripled her initial investment.

I thought I would try this strategy myself and bring some of my earnings passion into the mix. The day after the program I bought some shares of Buffalo Wild Wings (BWLD). The Bloomberg printout looked pretty attractive; returning an average gain after the earnings release of 8.63%. While BWLD showed a great Bloomberg report, there were still several stocks that showed a greater string of successes. These stocks, however, were not companies that made products I liked, or even heard of for that matter. So I went with Town’s advice and played the stock that makes tasty-wings.

The company beat the street and raised guidance and I was happy to make more than 14% on my initial investment. I will try to incorporate this strategy a few more times and keep everyone updated on how these plays shake out.

Happy Trading…

Tuesday, May 01, 2007

Book Review: Running Money

One of my summer goals is to read a massive amount of investment and personal finance books. I plan on giving a quick overview and detailed recommendation on each book I read this summer. The first book I read was Running Money by Andy Kessler.

Kessler documented his five years running a Silicon Valley hedge fund detailing his struggles raising money, dealing with high-flying technology boom, and surviving during the market downturns. Kessler's hedge fund sought tech stocks with valuable intellectual property and demonstrated the potential to double or triple in the near future. The fund, in fact, was a primarily long-only fund that usually kept its holdings for more than a year.

Personal Takeaways:
One particular aspect of the book that I liked was how Kessler articulated hedge fund price manipulation during conference calls. He pointed that funds with a strong short position often ask management utterly ridiculous questions to simply drive down the after-hours prices down half of a percentage point. I also liked the simplicity of his fund. The fund was run above an art studio and employed only one additional employee. Unlike the sexy funds run by Soros and others, Kessler was able to yield an average run of 50% without massive overhead.

I really liked several parts of the book including the series of chapters documenting the accumulation of capital and his personal take on achieving money in any type of market, but many parts of the book ran on offering only tidbits of concrete content spanning across several chapters. In short, I think this book is ideal for the long-term investor really interested in Silicon Valley. Personally, I enjoy short-term investing and doing so across all of the different industries not specializing on an isolated market segment. Go ahead and read the spark notes on this bad boy, they should give you the whole story in a couple pages.

Straddle Time!

I mentioned before in my series on options trading how to make money if you are unsure which way the stock may go in the future. I also pointed out that options are a zero sum game, making them inherently riskier than stocks. With that being said, I feel that investors have a significant chance of making money by using a straddle on Affiliated Computer Services (ACS) going into earnings.

Let's review the key elements of an attractive straddle. One of the most important aspects of a good straddle is the current price of the stock. The closer the price is to strike price of the call and put you are going to purchase, the better the straddle play is. The second most important part of the straddle is the costs to straddle. The cost is cheap if the break-even future prices are significantly less than your predicted future movement. The third most important part of a straddle is the time value of your option position; the longer you have to sell your call and put the less risk you are taking on.

Given these elements here's how ACS stacks up:
- The current price of the stock is only 9 cents away from the $60 strike price.
- I managed to pay $1 for both the call and put, meaning the stock would only need a 3.69% increase or a 3.46% decrease to be in the money given my broker’s options trading fees. As you can see from the Bloomberg image below, this straddle would have been in-the-money five out of the last six sessions after the earnings report.
- If you do take this position, you have the luxury of waiting until the 19th of May to liquidate your positions; a long time given this volatile market.

So why is this so cheap? There have been significant buyout talks driving the price of these options. I feel that this is insignificant because these talks have lasted for several months and it appears that shareholders are ultimately unsatisfied with these offers. In fact, I feel that this release will have a great impact on the bid price of this buyout firm, ultimately allowing for significant share price volatility.