Warren Buffett Now Works For Me!

Posted on December 3, 2007 by Nirav

I finally purchased my first share of Berkshire Hathaway today. Yes, its only 1 share but at $4,700 per share you want to ease into this sort of investment! BRK has two classes of shares. The A-class share (BRK-A) which sell for $140,000 EACH and the B-class share. I obviously bought the poor man’s class.

I had been watching it for the past year and every time I was going to buy, it had jumped 10% in the past week. I kept waiting for a pullback, but the stock would only consolidate and then after forming a base would jump again. I finally took the plunge and put in an order on Sunday, to be executed when the markets opened bright and early Monday morning.

With investments in a variety of different sectors like consumer retail, homebuilding, financials, commodities, currencies and foreign markets, its more diversified than most hedge funds. And it has lower fees than them too.

I’m going to try and attend the annual Berkshire shareholdes meeting in Omaha, Nebraska in the spring. I’ve heard there’s some sort of snobbery attached to owning the A-class shares vs the B-class. Apparently its the first thing other shareholders inquire when they meet each other there.

But even if I could afford to plunk down $140k in one stock, I’d still buy the B-shares. The B-shares don’t carry any voting rights, but I’m not going to delude myself into thinking that 1 lousy A-class share or even 1,000 shares would carry any weight in the running of the company. Warren Buffett owns the majority of the voting shares and besides, most shareholders vote to go with Buffett’s decisions anyway.

The advantage to owning B-class shares is that if you need the money to pay for a new house, a college degree, a heart-transplant or maybe a yacht, instead of selling $140,000 worth of stock in one go (and facing the resulting tax consequences), you can sell the exact amount you need (in ~$5,000 increments) and keep the rest invested. Its up 50 times in the past 10 years, and nearly 30% in the past year. Definitely a stock worth keeping for the long term.

Where else can I get a Billionaire to look after my investments and send me free investment advice every year?

Is It Time To Short General Motors?

Posted on November 10, 2007 by Nirav

General Motors (GM) announced a $39 Billion loss last week. Considering that its Market Cap is around $18 Billion, that’s a loss that is twice the value of the entire company!

The CEO tried to soften the impact of the loss by claiming it was a tax-related, non-cash write-down. They were infact carry-over tax losses that the bean-counters insist GM consider as a loss. Typically, tax losses are carried as assets (or so I’ve heard) and are used to offset the tax impacts of profits.

But GM has had a loss in the past 19 out 20 years (I think I read somewhere that the losses totalled $275 Billion), its market share has been dropping every year and its losing money on every car it sold. The only money it was making was from its very profitable financing department GMAC that was used to finance cars and houses. But the financing profits are starting to dry up as the economy starts to fall apart.

Its being forced to borrow more and more money every years in order to stay afloat. And the cost of its interest is rising.

It seems the accountants decided that GM cannot make a profit in the immediate future and is likely to go bankrupt. So they forced the company to take the “non-cash tax-loss” as a write-down, since there won’t be any profits to write them off.

So I think its time to start shorting GM. I haven’t always had success shorting stocks. I shorted Countrywide (CFC) and WCI Communities (WCI) a few months too early and took losses, instead of large profits. So I’ll be a little cautious about entering the trade on this one, but I still think there’s a chance GM might infact go bankrupt.

Jim Rogers Short On US Financials

Posted on November 5, 2007 by Nirav

Jim Rogers doesn’t have any faith in the US financial companies. According to Bloomberg:

Jim Rogers, co-founder of the Quantum Hedge Fund with billionaire George Soros, boosted his bets against U.S. securities firms because of their salary “excesses” and money-losing investments.

Rogers said he increased his year-old short positions in the past six weeks in U.S. investment banks, using exchange-traded funds and bets against individual companies he declined to name. Stocks in the industry, which pays too much in bonuses, may fall as much as 70 percent in a bear market, he said.

“You see 29-year-olds on Wall Street making $10 million to $20 million a year, and they think it’s normal,” Rogers, 65, said in an interview in London today.

The top five U.S. securities firms will probably earn a combined $29.3 billion this year, according to analysts surveyed by Bloomberg, breaking a three-year record streak after Merrill Lynch & Co. reported a $2.2 billion third-quarter loss. Goldman Sachs Group Inc., Morgan Stanley, Merrill, Lehman Brothers Holdings Inc. and Bear Stearns Cos. earned $30.7 billion last year, three times more than their profit in 2002.

Goldman Sachs, Wall Street’s most-profitable securities firm, said Sept. 20 that it set aside $16.9 billion to pay salaries, benefits and bonuses in the first nine months of the year, topping the record amount for all of last year.

A month later, Merrill Lynch reported its biggest quarterly loss amid $8.4 billion of writedowns for subprime mortgages, asset-backed bonds and bad loans.

Jim Rogers is short via the use of ETFs. One way you can get in on the action is through UltraShort Financials ProShares (SKF). SKF is a leveraged ETF that returns twice the daily inverse of the Dow Jones Financials Index.

Recently financials like Bank of America, Citigroup and Bear Stearns have reported pretty bad news. Seems like SKF would be a safer bet than shorting any of these companies themselves.

Where’s The Premium?

Posted on October 31, 2007 by Nirav

Penn West Energy Trust (PWE) announced that it would be buying Canetic Energy Trust (CNE). They’re both Canadian Income Trusts that payout a decent yield. However, there’s almost no premium offered to CNE holders. Well okay, there is a 7% premium offered to CNE holders but compared to the 30% premium that was offered to PrimeWest Energy Trust (PWI) by the state run utility company of Abu Dhabi, its pretty sad.

I can understand, why Abu Dhabhi is keen to get its hands on $5 Billion dollars worth of Gas. They simply want to get rid of their US Dollars! And afters today’s rate cut and the subsequent drop in the Dollar Index, I want to bail too!

I have a rather small stake in CNE and I’m happy with its 15% yield. In comparison, PWE only yields 13%. On the surface, I’d rather not exchange my shares. However, yield isn’t the only variable in this equation. You need to consider payout ratio and reserve life. There’s a good chance that PWE scores better on these criteria than CNE does. In that case, it would make sense to vote in favor of the take-over.

Earlier this year, Advantage Energy Trust (AAV) took over Sonic Energy Trust for almost no premium. But that was before the PWE deal and before energy prices were so high. And being a shareholder of AAV, I was extremely happy with the outcome. But now the shoe is on the other foot!

Being a shareholder in the acquired company, I think the premium is too small and I’ll probably just vote against it anyway. Let PWE come back with a better offer!

Goodbye TDAmeritrade, Hello Izone!

Posted on October 29, 2007 by Nirav

I just closed down my account with TDAmeritrade. I transferred everything to Izone.com.

Funnily enough, Izone is owned by TDAmeritrade and offers EVERYTHING that my regular TDAmeritrade account offered. Infact, the user-interface is identical. Its so identical, that the new username and password I created at izone.com even works at tdameritrade.com!!!!

So whats the difference? All the commissions are half-priced as compared to TDA.

But whats the catch? There’s no phone support and you need to have a couple of years online trading experience in order to open an account. Actually, I’m not sure about the ‘no phone support’ policy – I suspect that if you call up the customer support number for TDA and give them your izone username, it just might work. In any case, I usually asked my questions via email at TDA, so there’s no difference for me. And izone also has a live ‘customer support chat’ feature during normal business hours which has less wait time than the phone lines.

I did an internal transfer since my old account was at TDA. It took place at 11:45 pm so my regular trading wasn’t affected at all! Now thats some decent service!

Let me know if you want to open an account and I’ll send you a referral email. I think we both get 10 free trades.

Time To Bail On PetroChina?

Posted on October 23, 2007 by Nirav

I just sold half my stake in PetroChina(PTR). Actually I put the order in over the weekend and forgot about it. When I bought PTR, the dividend yield was 4.85%, which is more than you get in most bank CD’s. Since the whopping 130%+ run-up in price, the dividend yield has dropped to a mediocre 2.30%.

My first and foremost goal, when it comes to investing, is to get a good dividend yield. Most of my portfolio consists of high-yielding Canadian income funds (Canroys) and is heavily weighted towards oil & gas and mining companies.
Since there’s a lot of excitement surrounding PTR’s Chinese IPO, there’s a good chance that it can rise even higher. However, if the dividend yield doesn’t keep up, it might be a signal that the valuation is becoming too rich. Of course, if the market considers it a growth stock instead of a value stock, it deserves a low yield ( and high PE ratio). However, PTR is already the world 2nd largest company. How much more can it grow?

Will it double from here and become the world first Trillion Dollar Company? I don’t know. But I don’t think so. I’d rather take my profits and invest them in a company which has a better chance of doubling.

Time To Invest In Mutual Funds?

Posted on October 13, 2007 by Nirav

I was reading this article from the New York Times by Tim Gray called “Three Strategies That Kept Sizzling:

Ken Heebner, manager of CGM Focus, achieved a double distinction with his fund. He placed among the top performers for the most recent quarter and the five-year period. For the quarter, CGM Focus, which invests mainly in large-capitalization domestic stocks, returned 30.3 percent, while for the five years ended Sept. 30, it returned 32.9 percent, annualized.

Mr. Heebner’s offering isn’t for the faint-hearted. He shovels shareholders’ money into relatively few stocks 23 in late September and rapidly zips in and out of investments. When I buy a stock I say, What factors would cause me to change my view? he said. If I see them, I immediately sell. And if I see something I like better, I immediately sell. If there?s an emerging opportunity, I don’t want to miss it.

As a result, his portfolio has a higher-than-average annual turnover rate 333 percent, versus 90 percent for the average stock mutual fund, according to Morningstar. His returns also zigzag more than those of other funds in his Morningstar peer group.

Mr. Heebner sniffs out trends economic, social or demographic and then tries to find well-run companies poised to benefit from them. Lately, that has meant loading up on energy shares. On June 30, the most recent date for which data is available, he held the American depositary receipts of Petroleo Brasileiro, the giant Brazilian oil company, and Cnooc, one of China’s big producers, as well as shares in several oil services outfits. Energy stocks accounted for a third of his portfolio.

If you can live with that sort of volatility, you might get some terrific gains. Note, however in 2002, the Fund was down 28%. But for 2007 its up a whopping 60%!!!! Makes my 18% return seem extremely pathetic in comparison!

I was also looking at buying TAVFX which buys undervalued companies. But its returns have been less than mine and they require a $10,000 minimum to invest in. But its a lot less volatile, but with it comes a lower return.

How Traders Make 28% Returns In A Day

Posted on September 29, 2007 by Nirav

Friday’s stock market had a distinct sense of deja vu about it. Even though it was down overal, I was reminded of the crazy dotcom days in late 1999 when any tech stock could rally 25-50% in a single day!

One of my friend’s subscribes to a stock newsletter. Periodically he gets an email alert informing him when a stock is about to make a significant jump. He often sends them to me and I usually look at them and then ignore them. Yesterday he sent me an email about a China Clean Energy Inc (CCGY.OB).

By the time I got the email, it had already jumped 30% that day, but I really liked the chart. It had retreated about 15% from the highs of the day and looked like it was ready to make a move back up to the $2 range.

This is what the chart that I follow looks like.

The image is bit hard to understand since they’re aren’t any notations on it. The first chart is the intra-day stock price of CCGY.OB for September 28th 2007 using Candlesticks. It also has the bollinger bands and exponential moving average lines.

The 2nd chart with red and blue vertical lines denotes the volumne. The 3rd chart is the Relative Strength Index (or RSI) with oversold and overbought indicators.

The 4th chart is the Moving Average Convergence/Divergence indicator orMACD.

The last chart is the Slow Stochastic.

From these charts I felt that there was sufficient momentum in the stock to carry it higher, despite it having already jumped 30%. I was able to buy in at $1.73 around 12 pm EST (which was 9 am for me) and sure enough it continued higher throughout the day.

It closed the day at the highest price of $2.23, for a stunning 28.9% one day gain! Although the stock was up ~60% for the entire day, I was very happy with my 28%. Made me feel like I was reliving the good old dotcom (or dotbomb) days.

Here’s a much better daily chart.

Very rarely do I buy stocks based on tips and without looking at any underlying fundamentals. Usually, the newsletters that I subscribe to, will recommend a stock based on good, solid fundamentals and I will use the charts to determine the market sentiment for that stock and a good entry point. Recently, Freight Car America (RAIL) was recommended, but the chart looked terrible and I didn’t buy it. Sure enough it dropped from it’s recommended price of $48 and is now trading at $38. Here what the chart looks like. I’ll wait until the technicals improve before I jump in on that one.

Sometimes this strategy will backfire because some breaking news will come out that will send the stock shooting the opposite direction than expected, but it doesn’t happen often enough. And unexpected news can make value investors look like fools too!

Most traders use some form of technical analysis. Many investors believe that technical analysis is rubbish and doesn’t work, but they probably feel that way because they don’t understand it. Its basically a representation of the current market sentiment based on price and volume action.

Most traders use some from of it and it can get fairly complex. Studies have shown that currency traders use it a lot (or atleast the successful ones!). I’ve attended several currency traders meetup sessions and they all use some sort of technical analysis to trade in and out of their positions. That and proper money management is the key to succesful trading.

I strongly recommend at least learning the basics and deciding for yourself whether to use it or not. Getting Started In Technical Analysis is a really good book that’s fairly easy to read.

If you’re interested in learning about trading, I strongly, strongly recommend Trading for a Living: Psychology, Trading Tactics, Money Management. By far one of the best introductory books on the subjects. You’ll get more out of it than a $5,000 seminar!

If you like to day (or swing) trade, you’ll also enjoy An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund. A fascinating story about Timothy Sykes, a college student who made a million dollars day trading and started his own hedge fund.

Yield On 10 Year TBill Keeps On Dropping

Posted on August 30, 2007 by Nirav

Even though the past few sessions in the stock market have been rather choppy, the yield on the 10 year treasury has steadily dropped over the past several weeks.

Ever since the subprime mortgage issue led to a global liquidity crunch and subsequent stock market correction, the yield has been steadily dropping. This means that large institutions have been selling equities and moving money into safe US treasuries. It doesn’t matter if they get only 4.5% (as of today’s closing price), but at least they know they’ll get the principle back.

There seems to be a repricing of risk in the market. Any stock that is deemed to be risky has dropped in the past 6 weeks.

On the other hand, safe stocks like Warren Buffett’s Bershire Hathaway (BRK) has been rewarded and its stock price is up nearly 10%.

Lets see how long this flight to safety continues. If you have the courage to be greedy when other are fearful, you can make a lot of money.

Happy Investing!

Are Jim Cramer’s Stock Picks Worthless?

Posted on August 26, 2007 by Nirav

According to a recent article by Barron’s Magazine title The Cramer Effect (& Defect), readers who follow Jim Cramer’s stock picks from his show are more than likely to lose money in the long run.

We also looked at a database of Cramer’s Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks — Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market.

When we asked Cramer and CNBC for their own records of Mad Money’s stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test. They complained that the list from YourMoneyWatch.com contained some stocks from the program’s “Lightning Round,” in which Cramer gives a quick analysis and a buy or sell decision on stocks phoned in live by viewers. These, they argued, shouldn’t count in our tally.

CNBC officials also said that viewers should buy Cramer’s picks a week after they’re aired. They said that the show is mainly educational, and not just about stock-picking. In the end, they said we should focus only on the tiny universe of stock selections — about 12 a week — that Cramer researches the most. And we should do it only for the issues picked this year. CNBC analyzed these stocks, and said that if held for one month, they beat the S&P by 0.8%, or 1.7% after two months. They offered no results for the year-to-date.

It turns out that CNBC did its analysis incorrectly, and that the stocks beat the S&P by 0.4% in one month and 1.2% over two months. CNBC measured the stocks’ performance against the average performance of the S&P year-to-date, instead of against the performance of the S&P from the date of each stock pick. Also, it included more than 100 recently recommended stocks that weren’t held for the full one- or two-month holding period that CNBC claimed.

More important, the stocks fell short of the S&P by a statistically significant 2.2% through last week.

Our question is: How are viewers supposed to know that they should pay attention only to this subset of stock picks each week and ignore the thousands of others that Cramer makes on his show?

Then there’s the day-after-pop phenomenon. Our analysis of Cramer’s picks over the past two years, from YourMoneyWatch.com, showed that, on average, the stocks jumped 2% the day after he mentioned them. From there, they usually moved sideways or down for the following 30 trading days (see chart). This offered an opportunity to make money — 5% to 30% a year — by selling Cramer’s selections short.

Cramer agrees that there is a shorting opportunity in the temporary effect he has on stocks — a trade that he’d jump on if he still were at a hedge fund. “If you short the bump, you will do well,” he said last week. “I’ve said it on the show many times.”

I really don’t think people should be taking stock tips from a guy who has about a minute to analyze the stocks on his show. He may be a really smart guy but how can he properly evaluate a stock in the short time period he has?

I hope there aren’t too many people who base their stock investing solely based on his recommendations. But if they’re that ignorant or lazy, I guess they get what they deserve!

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