There is so much talk about gold. A few months ago, the started putting in Gold ATM's in the Middle East. If that isn't the sign of a top...I don't know what is. Millions of Americans...and probably people from all over the world are long gold now, and it has to be one of the most crowded trades in the universe.
A crowded trade is when so many people are in it, that the last one out of it should expect to see losses well over 20%, maybe even over 50% before the selling is done. Let me just mention a couple things that worry me about gold.
1) Everyone owns it, and the way investments work...at least when you make money on them, is to sell it to someone else for more than you bought it. If everyone owns gold...who is going to buy yours?
2) Gold is rarely used anymore outside of jewelry. Gold used to be in dental applications...but it's just too soft (and too expensive) to be used regularly for many industrial uses. Metals like aluminum, copper, steel, and even silver, platinum, and palladium all have industrial uses (which provide a level of natural or healthy demand).
3) The demand for gold, as we see it, is largely investor driven. Every investment falls out of favor eventually...why would this be the ONE that didn't?
4) Most people own gold through the GLD or other ETF that tracks gold. Those ETFs actually have to hold the physical gold in order to track the index as a percentage of assets under management. Who in the HECK is going to buy all that gold from them when people hit the sell button? What will that do to the price?
5) Gold is HEAVILY correlated to the S&P...don't believe me, check out the video we did a few months back and see the chart yourself:
6) I spoke with Guy Adami on America's Favorite Traders about Gold and his comments were disturbing. This is a man who was the head gold trader at TWO FIRMS, who has met the biggest gold traders out there, and who "wouldn't own gold if someone put a gun to his head." For more details you can listen to the full interview here:
http://www.magnumopusfinancial.com/demystify/2010/adami.php
I think Jim Cramer is right, the world will run out of gold to pull out of the ground, and the places to get it will become more and more the most dangerous places left on the earth to go mining for them between the government risk and military risk. So, if that's the case...why not own a gold miner in that instance, especially a foreign one that may be able to avoid some of the "anti-American" sentiment that is found in places that are a little scarier in the world.
Compania de Minas Buenaventura (BVN) is a Peruvian Gold Miner with a forward P/E of 11.82, a PEG of 1.65, Cash of $444 Million with only $27 Million in debt, and pays a dividend of 1.6%. I get why people WANT to own gold...we just think you should strongly consider not doing it any way.
If the world's economy collapses, you're kidding yourself if you think I'll trade you my food for your gold. You're better off stocking up on food storage and a taser to fend people off. But, until then, consider owning a gold miner instead of the GLD or the physical metal...at least until someone pulls the fire alarm and everyone presses the sell button at the same time.
Thursday, August 12, 2010
Monday, July 12, 2010
I'm Cheap
By now, if you've seen any of our comments on Twitter, you probably know that we're cheap. Paying up for anything, a car, a home, a movie, and especially stocks/bonds is against our personal religion and something we try to avoid at all costs. As investors, everyone should avoid buying expensive stocks/bonds.
Specifically regarding bonds, we really only like to pay below par for a bond, being that the bond will be redeemed for par...we just find it too difficult to figure out when you get out of a bond if you already bought it for more than par. Obviously, if you hold a bond that you bought for more than par to maturity...you're going to lose money when the bond principle is paid out since all bonds end up at par by maturity. So, a quick lesson on bonds for you individual investors out there is to try and only by bonds when you can get them below par...or you may fall into a yield trap (which you can do when you buy them too far below par as well). We'll save the bond less for another day.
Today, since we were asked about valuation, and how we use it, we're going to talk about stocks. P/E and recently PEG, are the two things we use before we even look at a stock further. Often, if a stock has a P/E over 18...we just don't even take a look at it. BUT, there are a couple metrics that we use that will let us buy a stock with a P/E north of 18 and stick to our discipline.
One of the things we'll use to buy a stock with a P/E north of 18 is forward P/E. So, trailing P/E is valuation based on earnings already in the book...so nothing really to figure out there because everything you're looking at (P, E, and M (the multiple)) is real time and you can trust it. Forward P/E, that's the P/E based on either guidance from the company OR from analysts when the company doesn't give forward guidance. When we see a stock with a current P/E that's HUGE, but a forward P/E that's in our range...we get very interested. It's a simple math problem from there. For more on P/E, check out the video from our YouTube Channel on how to do the math (it's easier to watch then to write it out).
EMC is a perfect example of a stock that has a P/E of 32.04, but a forward P/E of 14.2. That's EXACTLY what we want to see. If those forward earnings come to fruition, then we could see the stock trade BACK UP to something close to 32 (since it trades there now and people still own it). So we'll say, forward earnings are $1.36 ($19.45 current price divided by 14.2 forward P/E (19.45/14.2) = 1.36 in earnings). Then, we apply a discounted multiple back on the earnings. If it trades at 32 now...what if it trades with a P/E of 20, you get a stock price of $27.39. That's about $8 higher than the stock trades at right now...we double check the PEG (that's P/E dividend by long term growth rate) and we see that EMC trades with a 0.99 PEG...so the future earnings SHOULD be higher than current earnings and the stock is actually "cheap" and can be bought here safely.
PEG is like taking the temperature for us. A stock may look healthy based on the P/E, but may actually be overheated if the PEG is too high. A PEG over 2 usually signals to us that the growth really isn't there (or there are not enough analysts out there that think it's there and so no one's model includes high growth in it) and we have to believe everyone else that values the company is wrong and we're right. We usually don't like to make that bet, so we avoid stocks with a PEG over 2.
Walking away from stocks with high P/E multiples and a PEG over 2 means that we'll often miss some of the market's hottest stocks. That's OK, those that follow us have to know that we're value managers, not growth managers over here. Every now and then we get up the guts to buy something like VMWare (which we caught for 22 points) or Amazon (which we flagged as a buy at $70/share)...but then we get off before most people do when we catch a move like that because we're value investors over here...not growth. Something like a SalesForce.com is a PERFECT example of something that we'd normally stay away from because P/E is 140, forward P/E is 60 and the PEG is 2.83. BUT, if we believe that analysts have estimates that are too low, and that the "G" in PEG could be higher, or that E will come in better than expected...that will bring down P/E (momentarily) to something more reasonable. If you believe in a strong, secular trend, like cloud computing, then owning SalesForce.com (CRM) might not be as reckless as valuation indicates (but you MUST be right about the growth and earnings). If you're wrong, and you own a stock like Google, when they pulled out of China, the decline will be breathtaking ($150 was erased off Google's stock price in a matter of weeks). Those kinds of losses can be devastating.
What is one instance when we will ignore a high PEG? When we don't need/want growth. Take for instance, an MLP (Master Limited Partnership) that we really don't care if they grow that much...we just want the dividend paid consistently. We're not that concerned about the PEG as these companies rarely grow at the rate of an Apple, Google, Amazon, VMWare, SalesForce.com, etc. Take one of our favorite, Calumet Specialty Products Partners (CLMT), it trades with a forward P/E of 11.42 (that's great for us), but the PEG is 9.41. That's a terrible PEG, but we don't expect big growth out of a company like CLMT. Look at KMP, a P/E of 34.41 and a PEG of 11.75. That is TERRIBLE if you compare it to other companies...but we own KMP for the dividend (although, KMP is now getting expensive compared to other MLPs and you may want to consider swapping out of KMP and into another MLP before everyone else figures that out as well and does it before you do, leaving you with a lower stock price). The same is true of Kilroy Realty...and many other big dividend paying stocks that don't have big growth...you can ignore PEG (except you probably want to use it to compare it to other stocks in the same category).
There are reasons to use P/E and PEG, and some reasons not to (in certain circumstances)...but, as a general rule for us...cheaper is always better.
Specifically regarding bonds, we really only like to pay below par for a bond, being that the bond will be redeemed for par...we just find it too difficult to figure out when you get out of a bond if you already bought it for more than par. Obviously, if you hold a bond that you bought for more than par to maturity...you're going to lose money when the bond principle is paid out since all bonds end up at par by maturity. So, a quick lesson on bonds for you individual investors out there is to try and only by bonds when you can get them below par...or you may fall into a yield trap (which you can do when you buy them too far below par as well). We'll save the bond less for another day.
Today, since we were asked about valuation, and how we use it, we're going to talk about stocks. P/E and recently PEG, are the two things we use before we even look at a stock further. Often, if a stock has a P/E over 18...we just don't even take a look at it. BUT, there are a couple metrics that we use that will let us buy a stock with a P/E north of 18 and stick to our discipline.
One of the things we'll use to buy a stock with a P/E north of 18 is forward P/E. So, trailing P/E is valuation based on earnings already in the book...so nothing really to figure out there because everything you're looking at (P, E, and M (the multiple)) is real time and you can trust it. Forward P/E, that's the P/E based on either guidance from the company OR from analysts when the company doesn't give forward guidance. When we see a stock with a current P/E that's HUGE, but a forward P/E that's in our range...we get very interested. It's a simple math problem from there. For more on P/E, check out the video from our YouTube Channel on how to do the math (it's easier to watch then to write it out).
EMC is a perfect example of a stock that has a P/E of 32.04, but a forward P/E of 14.2. That's EXACTLY what we want to see. If those forward earnings come to fruition, then we could see the stock trade BACK UP to something close to 32 (since it trades there now and people still own it). So we'll say, forward earnings are $1.36 ($19.45 current price divided by 14.2 forward P/E (19.45/14.2) = 1.36 in earnings). Then, we apply a discounted multiple back on the earnings. If it trades at 32 now...what if it trades with a P/E of 20, you get a stock price of $27.39. That's about $8 higher than the stock trades at right now...we double check the PEG (that's P/E dividend by long term growth rate) and we see that EMC trades with a 0.99 PEG...so the future earnings SHOULD be higher than current earnings and the stock is actually "cheap" and can be bought here safely.
PEG is like taking the temperature for us. A stock may look healthy based on the P/E, but may actually be overheated if the PEG is too high. A PEG over 2 usually signals to us that the growth really isn't there (or there are not enough analysts out there that think it's there and so no one's model includes high growth in it) and we have to believe everyone else that values the company is wrong and we're right. We usually don't like to make that bet, so we avoid stocks with a PEG over 2.
Walking away from stocks with high P/E multiples and a PEG over 2 means that we'll often miss some of the market's hottest stocks. That's OK, those that follow us have to know that we're value managers, not growth managers over here. Every now and then we get up the guts to buy something like VMWare (which we caught for 22 points) or Amazon (which we flagged as a buy at $70/share)...but then we get off before most people do when we catch a move like that because we're value investors over here...not growth. Something like a SalesForce.com is a PERFECT example of something that we'd normally stay away from because P/E is 140, forward P/E is 60 and the PEG is 2.83. BUT, if we believe that analysts have estimates that are too low, and that the "G" in PEG could be higher, or that E will come in better than expected...that will bring down P/E (momentarily) to something more reasonable. If you believe in a strong, secular trend, like cloud computing, then owning SalesForce.com (CRM) might not be as reckless as valuation indicates (but you MUST be right about the growth and earnings). If you're wrong, and you own a stock like Google, when they pulled out of China, the decline will be breathtaking ($150 was erased off Google's stock price in a matter of weeks). Those kinds of losses can be devastating.
What is one instance when we will ignore a high PEG? When we don't need/want growth. Take for instance, an MLP (Master Limited Partnership) that we really don't care if they grow that much...we just want the dividend paid consistently. We're not that concerned about the PEG as these companies rarely grow at the rate of an Apple, Google, Amazon, VMWare, SalesForce.com, etc. Take one of our favorite, Calumet Specialty Products Partners (CLMT), it trades with a forward P/E of 11.42 (that's great for us), but the PEG is 9.41. That's a terrible PEG, but we don't expect big growth out of a company like CLMT. Look at KMP, a P/E of 34.41 and a PEG of 11.75. That is TERRIBLE if you compare it to other companies...but we own KMP for the dividend (although, KMP is now getting expensive compared to other MLPs and you may want to consider swapping out of KMP and into another MLP before everyone else figures that out as well and does it before you do, leaving you with a lower stock price). The same is true of Kilroy Realty...and many other big dividend paying stocks that don't have big growth...you can ignore PEG (except you probably want to use it to compare it to other stocks in the same category).
There are reasons to use P/E and PEG, and some reasons not to (in certain circumstances)...but, as a general rule for us...cheaper is always better.
Saturday, July 10, 2010
The Blue Box
Best Buy is toast. The other week at the office, we had a conversation about Best Buy...and it's hard not to think that they're in trouble. Their most recent quarter, although not the horror show that some analysts say it was...was something to be concerned about.
Circuit City is gone, and for several quarters, it was clear Best Buy grabbed all their customers. The stock rocketed. But then, after the most recent quarter, we starting thinking about what might go wrong with Best Buy. Losing money is always the bigger risk when managing money than not making enough. People are generally happy, as long as they don't see red. Black is the new green these days.
So, after seeing the stock decline, selling the stock, then cashing out of the puts...we're left wondering what the future holds for Best Buy. Their biggest risk: pre-packaged media. That's the HUGE section of the store right in the center for movies, music, and games. That's right...going the the store and buying the ACTUAL CD or DVD will soon disappear. And with it, go great margins, revenue, and ultimately profit dollars. Granted, Best Buy announced on the call that they will be beating up GameStop and stealing their lunch money (they're going to start buying, selling, and trading of used games). This new strategy will help offset some of the revenue lost from other media sales...but it will only delay the inevitable: people shop online more an more these days. We visited the local Best Buy to see what computers they had in stock when it was time to get a new laptop at the office. It was clear that we could get far more from a NewEgg.com or a TigerDirect.com than we could by going into the store...and we're willing to bet we're not alone in what we have found.
iTunes has revolutionized content distribution along with NetFlix. If other companies don't catch up, they will be eliminated...Circuit City style. These two companies are taking a huge bite out of Best Buy's pre-packaged media sales with their direct download to consumer programs. So, what is the solution you say, for Best Buy?
Best Buy needs to buy BlockBuster Video. BLOKA.PK (because it now trades on Pink Sheets after it was delisted) is in a world of hurt. Holleywood Video has already been eliminated (Movie Gallery) and BlockBuster is next. Why? Thanks to CoinStar...the creator of the Red Box, brick and mortar movie rental places are getting burned to the ground by these little red boxes with little overhead, no healthcare costs, and loads of profits. BlockBuster has already countered with the Blue Box...but it's too little too late. The ENTIRE MARKET CAP of BlockBuster's stock is now only $36 Million. Heck, for that price Best Buy could take a stab at it and be wrong and still come out OK...but I think that they'd come out better than OK.
First of all, the color schemes are almost identical, so very little in terms of branding would need to be done. They could change the name or leave it, and I don't think people would notice.
Second, all that space they now have in their stores can be converted from pre-packaged media into a BlockBuster. They keep only the hottest selling music in stock (same thing with DVDs, which BlockBuster already sells) and then throw in the buy/sell/trade for music, movies, and games (since they're getting into the act with video games...no reason to stop there). This should be a much better use of the space in stores and they need more revenue/sq foot in the stores because media sales are down so much.
Third, BlockBuster already competes with NetFlix via it's in-the-mail-style rental package. Jumping with both feet into the content distribution for Best Buy should help margins and bring a serious competitor to NetFlix. You can easily see sales reps cross selling the down loadable content to those ready to walk out of Best Buy with a new television. Best Buy can work with the makers of the products it sells to add capability to the televisions, pick a video game partner...the sky would be endless. Deals like buy a television and get access to our downloadable content free for 3 months (after which the billing starts) would help subscriptions skyrocket for the BlockBuster division of the company who already has the service...they just need Best Buy's distribution.
Finally, having a Blue Box outside EVERY Best Buy all over the world means that they have instant revenue Red Box style. I think Blue Box even has a deal with Sheetz, the gas station extravaganza that draws all sorts of people with it's selection and variety of things inside. Adding a Blue Box to the outside of every Best Buy should ADD to the foot traffic inside the stores as some will ultimately venture into the store to shop after they grab a movie. Or, you can see them buying a new BlueRay or Home Theatre and grabbing a movie on the way out.
BlockBuster may have $1 Billion in debt...but it looks like their free cash flow is $650 Million...plenty of cash coming in to refinance the debt with the financial backing of Best Buy behind it. The issue for BLOCKA.PK is that on their own...they face extinction and they just don't have the balance sheet to make it. At 16.5 cents/share for BlockBuster we think Best Buy is missing out on a great opportunity grab a perfect, complimentary asset...at a block buster price (and it's a move that might just save both companies).
Circuit City is gone, and for several quarters, it was clear Best Buy grabbed all their customers. The stock rocketed. But then, after the most recent quarter, we starting thinking about what might go wrong with Best Buy. Losing money is always the bigger risk when managing money than not making enough. People are generally happy, as long as they don't see red. Black is the new green these days.
So, after seeing the stock decline, selling the stock, then cashing out of the puts...we're left wondering what the future holds for Best Buy. Their biggest risk: pre-packaged media. That's the HUGE section of the store right in the center for movies, music, and games. That's right...going the the store and buying the ACTUAL CD or DVD will soon disappear. And with it, go great margins, revenue, and ultimately profit dollars. Granted, Best Buy announced on the call that they will be beating up GameStop and stealing their lunch money (they're going to start buying, selling, and trading of used games). This new strategy will help offset some of the revenue lost from other media sales...but it will only delay the inevitable: people shop online more an more these days. We visited the local Best Buy to see what computers they had in stock when it was time to get a new laptop at the office. It was clear that we could get far more from a NewEgg.com or a TigerDirect.com than we could by going into the store...and we're willing to bet we're not alone in what we have found.
iTunes has revolutionized content distribution along with NetFlix. If other companies don't catch up, they will be eliminated...Circuit City style. These two companies are taking a huge bite out of Best Buy's pre-packaged media sales with their direct download to consumer programs. So, what is the solution you say, for Best Buy?
Best Buy needs to buy BlockBuster Video. BLOKA.PK (because it now trades on Pink Sheets after it was delisted) is in a world of hurt. Holleywood Video has already been eliminated (Movie Gallery) and BlockBuster is next. Why? Thanks to CoinStar...the creator of the Red Box, brick and mortar movie rental places are getting burned to the ground by these little red boxes with little overhead, no healthcare costs, and loads of profits. BlockBuster has already countered with the Blue Box...but it's too little too late. The ENTIRE MARKET CAP of BlockBuster's stock is now only $36 Million. Heck, for that price Best Buy could take a stab at it and be wrong and still come out OK...but I think that they'd come out better than OK.
First of all, the color schemes are almost identical, so very little in terms of branding would need to be done. They could change the name or leave it, and I don't think people would notice.
Second, all that space they now have in their stores can be converted from pre-packaged media into a BlockBuster. They keep only the hottest selling music in stock (same thing with DVDs, which BlockBuster already sells) and then throw in the buy/sell/trade for music, movies, and games (since they're getting into the act with video games...no reason to stop there). This should be a much better use of the space in stores and they need more revenue/sq foot in the stores because media sales are down so much.
Third, BlockBuster already competes with NetFlix via it's in-the-mail-style rental package. Jumping with both feet into the content distribution for Best Buy should help margins and bring a serious competitor to NetFlix. You can easily see sales reps cross selling the down loadable content to those ready to walk out of Best Buy with a new television. Best Buy can work with the makers of the products it sells to add capability to the televisions, pick a video game partner...the sky would be endless. Deals like buy a television and get access to our downloadable content free for 3 months (after which the billing starts) would help subscriptions skyrocket for the BlockBuster division of the company who already has the service...they just need Best Buy's distribution.
Finally, having a Blue Box outside EVERY Best Buy all over the world means that they have instant revenue Red Box style. I think Blue Box even has a deal with Sheetz, the gas station extravaganza that draws all sorts of people with it's selection and variety of things inside. Adding a Blue Box to the outside of every Best Buy should ADD to the foot traffic inside the stores as some will ultimately venture into the store to shop after they grab a movie. Or, you can see them buying a new BlueRay or Home Theatre and grabbing a movie on the way out.
BlockBuster may have $1 Billion in debt...but it looks like their free cash flow is $650 Million...plenty of cash coming in to refinance the debt with the financial backing of Best Buy behind it. The issue for BLOCKA.PK is that on their own...they face extinction and they just don't have the balance sheet to make it. At 16.5 cents/share for BlockBuster we think Best Buy is missing out on a great opportunity grab a perfect, complimentary asset...at a block buster price (and it's a move that might just save both companies).
Saturday, July 3, 2010
Financial Television is Like a Comic Book Series
People don't watch enough television. Seriously, I hear people all the time who say that so and so recommended a stock on television and all of a sudden it's down and they've lost money and they want to know what to do.
They're getting it all wrong. Television isn't one long buy/sell list for investors to watch, execute the trade, and then get rich. That's now how television works. If you read our article earlier "They Are Idiots", then you know that when you buy a stock from someone, you have to make the bet that they are an idiot...otherwise you are the idiot; as they convinced you to buy something they didn't want anymore. Guess how many other people are watching EXACTLY THE SAME THING you are watching right then; and you now have to trade with AND against these people to make money.
Say Steve Grasso comes on television and says he's buying BP, which he did. And then you go on vacation, forget about the real world for a week, come back and check on your BP position. You see that it's down from $34 to $27 and think: "What the heck happened to BP? That Grasso guy is an idiot, I'll never listen to him again." This is where people go wrong. A few days later, after getting long BP, Steve Grasso, Patty Edwards, and many others on the Fast Money Desk stated very clearly that BP had gotten too difficult to measure and that there was too much risk in the trade and that they had sold their position and were not going back in.
Watching television, at least financial television, is like reading a comic book. If you don't read every single issue that comes out, you are GOING TO MISS SOMETHING. That detail that you miss, could cost you hundreds or thousands of dollars. Like reading a comic book, it's important to read a few issues before you form an opinion. The biggest mistake (one of them) retail investors make is in thinking that a stock is going to run away from them, so they jump in when they hear a convincing story on say Jim Cramer's Executive Decision Segment, where he has a CEO from a company come on and tell you what's new and exciting about their company. Then, Cramer says he likes the company, the person is so excited, they go and buy it the next morning at the open (often the time that people pay too much and get crushed by the end of the day).
What they have forgotten, or not witnessed, is that on ANOTHER episode of Mad Money, Jim Cramer vehemently warned viewers to always wait 5 days before buying a stock, never buy your whole position at once (in case the stock goes down and you can get it for cheaper), and always use limit orders so you get the price you want. But, the person who buys this stock after the Executive Decision segment missed the other shows about disciplined investing and ignored all of Cramer's rules for buying a stock. They exclaim that Steve Grasso and Jim Cramer are idiots and they never buy another stock again (or they repeat their mistake after listening to someone else on TV).
The bottom line, you MUST watch EVERYTHING before you buy ANYTHING. Shows like Fast Money, Mad Money, Strategy Session, and Stop Trading are terrific; but they are often just one piece of a much bigger puzzle that needs to be pieced together before you buy or sell a position. There will never be any substitution for doing your own homework. When you watch someone on television they will ASSUME that YOU, the viewer, has heard everything else they have said or written. They have to do that, otherwise, they would say the same thing every single time that you watched them. This wouldn't help anyone...and it certainly wouldn't be entertaining. So, next time, before you make a decision that costs you thousands of dollars, "read up" and watch a week's worth of whatever program it is you're watching until you understand how each person trades so that when they change their mind on BP, Research in Motion (RIMM), or Goldman Sachs (GS) you'll be there to see it and then you can change yours too...after you do your homework of course.
They're getting it all wrong. Television isn't one long buy/sell list for investors to watch, execute the trade, and then get rich. That's now how television works. If you read our article earlier "They Are Idiots", then you know that when you buy a stock from someone, you have to make the bet that they are an idiot...otherwise you are the idiot; as they convinced you to buy something they didn't want anymore. Guess how many other people are watching EXACTLY THE SAME THING you are watching right then; and you now have to trade with AND against these people to make money.
Say Steve Grasso comes on television and says he's buying BP, which he did. And then you go on vacation, forget about the real world for a week, come back and check on your BP position. You see that it's down from $34 to $27 and think: "What the heck happened to BP? That Grasso guy is an idiot, I'll never listen to him again." This is where people go wrong. A few days later, after getting long BP, Steve Grasso, Patty Edwards, and many others on the Fast Money Desk stated very clearly that BP had gotten too difficult to measure and that there was too much risk in the trade and that they had sold their position and were not going back in.
Watching television, at least financial television, is like reading a comic book. If you don't read every single issue that comes out, you are GOING TO MISS SOMETHING. That detail that you miss, could cost you hundreds or thousands of dollars. Like reading a comic book, it's important to read a few issues before you form an opinion. The biggest mistake (one of them) retail investors make is in thinking that a stock is going to run away from them, so they jump in when they hear a convincing story on say Jim Cramer's Executive Decision Segment, where he has a CEO from a company come on and tell you what's new and exciting about their company. Then, Cramer says he likes the company, the person is so excited, they go and buy it the next morning at the open (often the time that people pay too much and get crushed by the end of the day).
What they have forgotten, or not witnessed, is that on ANOTHER episode of Mad Money, Jim Cramer vehemently warned viewers to always wait 5 days before buying a stock, never buy your whole position at once (in case the stock goes down and you can get it for cheaper), and always use limit orders so you get the price you want. But, the person who buys this stock after the Executive Decision segment missed the other shows about disciplined investing and ignored all of Cramer's rules for buying a stock. They exclaim that Steve Grasso and Jim Cramer are idiots and they never buy another stock again (or they repeat their mistake after listening to someone else on TV).
The bottom line, you MUST watch EVERYTHING before you buy ANYTHING. Shows like Fast Money, Mad Money, Strategy Session, and Stop Trading are terrific; but they are often just one piece of a much bigger puzzle that needs to be pieced together before you buy or sell a position. There will never be any substitution for doing your own homework. When you watch someone on television they will ASSUME that YOU, the viewer, has heard everything else they have said or written. They have to do that, otherwise, they would say the same thing every single time that you watched them. This wouldn't help anyone...and it certainly wouldn't be entertaining. So, next time, before you make a decision that costs you thousands of dollars, "read up" and watch a week's worth of whatever program it is you're watching until you understand how each person trades so that when they change their mind on BP, Research in Motion (RIMM), or Goldman Sachs (GS) you'll be there to see it and then you can change yours too...after you do your homework of course.
Monday, May 10, 2010
No Hope for the Weary
I sat next to someone on the plane from California over the weekend and I was struck, nearly dumb by his comments. He spun a tale of conspiracy, paid-off government, oligarchs, financial misgivings, bail-outs, smoke and mirrors, uprising, chaos, and civil war. By the time he was done telling his tale I only had one question: "Why do you live in the United States?"
Seriously, if our country is so horrible and terrible, which he attempted to convince me in under 10 minutes, then why live here? He then answered that, at least for now, Americans believed in the "Rule of Law" more than any other country and as long as the government can keep us in the matrix, then the "Rule of Law" will govern us, even as we're free to rebel and overthrow our government (which he thinks oppresses us and keeps us impoverished because the government is owned by the banks and the oligarchs, of which I get the impression he thinks Warren Buffet is one). I couldn't bring myself to learn more about his twisted view of our world and I really couldn't stand the thought of another 10 minutes of terror if I asked him to tell me just who the oligarchs are. He made mention of Warren Buffet's deal for Preferred Stock with Goldman Sachs (which I get the impression that he thinks was done with fire and blood in a dark room with everyone wearing robes and fancy handshakes) and that was enough for my taste.
I felt like saying something that you'll hear Guy Adami say frequently on CNBC's Fast Money: "So what's the trade?" Seriously, all this conspiracy stuff is great for movies (if you like that sort of thing) but how do you make money? If the world is going to fall apart, or we're going to have a genuine populous revolt, shouldn't their be a way to profit from it? I know that sounds terrible, but one thing I've noticed since I started managing money (professionally) 6 years ago was that I was able to reduce everything to dollars and cents. It has made me much less emotional and that's how I'm able to think in black and white regarding decisions the people I advise/manage/work with is by eliminating my emotional attachment to the subject and look at it objectively.
Jim Cramer is great at reducing any caller's question to one thing: "Is the stock going to go up or down?" "It doesn't matter what your cost basis is," is something we've seen him tell dozens of callers and write in his books. It only matters whether or not you think the investment (of any kind) will go up or down. If you know/feel/think/believe that it's going to decline or there is significant risk to such, then you just sell it and look to allocate your capital elsewhere.
"Hope is not an investment thesis," is something I've heard several times, from both Guy Adami, Jim Cramer, and many others. I had a call, just today, and I was told "I know that solar power doesn't really make economic sense right now, but I'm really hoping that in the future we'll have cleaner energy and I want to benefit from it financially." But, his thesis was ultimately that he would like to see clean energy be successful and so if his hope is realized, then the stocks of solar companies would indeed rise in value.
Unfortunately, no matter what people want the future to look like, when it comes to your money, that should never be part of the thought process. The only two things you want to know are Guy Adami's "what's the trade" and Jim Cramer's "is it going to go up or down from here". If you can answer these two questions, then I think you can be successful as an investor. Do not find yourself investing in what you'd like to happen; but rather, what you think will make you money. It's fine if you will not put money into companies that you think are morally reprehensible, but you certainly shouldn't make the connection between buying something like Massey or BP and wanting to the world to burn on the use of dirty, unsafe carbon fuels. It means that the stocks went down and they're tremendously oversold and represent very attractive investments because all the bad news of the two events and MUCH MORE are now "priced in" to the stock's price. That's it, with investing, it's about doing just that...investing...making money.
Bottom line on this story, when it comes to where you place your capital to invest in your future, try to ignore what you'd like the future to look like and try to think about what you think the future probably will look like, and go with the latter. Now, when it comes to your social causes, where you donate your time and money...that's when you get your big heart out and give back to the world you live in. When you are being charitable, it helps to get out a big bag of hope and spread it like salt on mashed potatoes.
So lets recap: 1) When it comes to making money, ignore what's said on the news, ignore your friends, please don't listen to anyone at the office, do your homework, and make sure you feel like it's going to go up based on what you learn from doing your analysis before you invest. 2) When it comes to hope, make sure you have a lot of it as this world is a tough one and you'll face many challenges ahead, but make sure you check your hope at the door before you sit down in front of your computer to trade because "hope is not a valid investment thesis."
PS. Stop watching the news, and try putting CNBC on mute for most of Power Lunch unless Steve Grasso or Fast Money is on and when the market closes, you can come back at 5pm to take it off for 2 hours.
Seriously, if our country is so horrible and terrible, which he attempted to convince me in under 10 minutes, then why live here? He then answered that, at least for now, Americans believed in the "Rule of Law" more than any other country and as long as the government can keep us in the matrix, then the "Rule of Law" will govern us, even as we're free to rebel and overthrow our government (which he thinks oppresses us and keeps us impoverished because the government is owned by the banks and the oligarchs, of which I get the impression he thinks Warren Buffet is one). I couldn't bring myself to learn more about his twisted view of our world and I really couldn't stand the thought of another 10 minutes of terror if I asked him to tell me just who the oligarchs are. He made mention of Warren Buffet's deal for Preferred Stock with Goldman Sachs (which I get the impression that he thinks was done with fire and blood in a dark room with everyone wearing robes and fancy handshakes) and that was enough for my taste.
I felt like saying something that you'll hear Guy Adami say frequently on CNBC's Fast Money: "So what's the trade?" Seriously, all this conspiracy stuff is great for movies (if you like that sort of thing) but how do you make money? If the world is going to fall apart, or we're going to have a genuine populous revolt, shouldn't their be a way to profit from it? I know that sounds terrible, but one thing I've noticed since I started managing money (professionally) 6 years ago was that I was able to reduce everything to dollars and cents. It has made me much less emotional and that's how I'm able to think in black and white regarding decisions the people I advise/manage/work with is by eliminating my emotional attachment to the subject and look at it objectively.
Jim Cramer is great at reducing any caller's question to one thing: "Is the stock going to go up or down?" "It doesn't matter what your cost basis is," is something we've seen him tell dozens of callers and write in his books. It only matters whether or not you think the investment (of any kind) will go up or down. If you know/feel/think/believe that it's going to decline or there is significant risk to such, then you just sell it and look to allocate your capital elsewhere.
"Hope is not an investment thesis," is something I've heard several times, from both Guy Adami, Jim Cramer, and many others. I had a call, just today, and I was told "I know that solar power doesn't really make economic sense right now, but I'm really hoping that in the future we'll have cleaner energy and I want to benefit from it financially." But, his thesis was ultimately that he would like to see clean energy be successful and so if his hope is realized, then the stocks of solar companies would indeed rise in value.
Unfortunately, no matter what people want the future to look like, when it comes to your money, that should never be part of the thought process. The only two things you want to know are Guy Adami's "what's the trade" and Jim Cramer's "is it going to go up or down from here". If you can answer these two questions, then I think you can be successful as an investor. Do not find yourself investing in what you'd like to happen; but rather, what you think will make you money. It's fine if you will not put money into companies that you think are morally reprehensible, but you certainly shouldn't make the connection between buying something like Massey or BP and wanting to the world to burn on the use of dirty, unsafe carbon fuels. It means that the stocks went down and they're tremendously oversold and represent very attractive investments because all the bad news of the two events and MUCH MORE are now "priced in" to the stock's price. That's it, with investing, it's about doing just that...investing...making money.
Bottom line on this story, when it comes to where you place your capital to invest in your future, try to ignore what you'd like the future to look like and try to think about what you think the future probably will look like, and go with the latter. Now, when it comes to your social causes, where you donate your time and money...that's when you get your big heart out and give back to the world you live in. When you are being charitable, it helps to get out a big bag of hope and spread it like salt on mashed potatoes.
So lets recap: 1) When it comes to making money, ignore what's said on the news, ignore your friends, please don't listen to anyone at the office, do your homework, and make sure you feel like it's going to go up based on what you learn from doing your analysis before you invest. 2) When it comes to hope, make sure you have a lot of it as this world is a tough one and you'll face many challenges ahead, but make sure you check your hope at the door before you sit down in front of your computer to trade because "hope is not a valid investment thesis."
PS. Stop watching the news, and try putting CNBC on mute for most of Power Lunch unless Steve Grasso or Fast Money is on and when the market closes, you can come back at 5pm to take it off for 2 hours.
Monday, May 3, 2010
They are Idiots.
Every now and then I talk to people who think that when you buy the stock of a publicly traded company, that you buy it from the company. Heck, it happened yesterday. So, the first thing I tell them is that a company only sells stock a few times in its existence...say 1/2 a dozen times or so...maybe more if it buys a lot of other companies. If it does this, by the way, you should be concerned. Read Jim Cramer's book: "You got screwed" about how Enron went down and you too can be worried about companies that endlessly acquire other companies (think Oracle...don't know if it's different in their case, but they are serial acquirers).
So, the bottom line of the above comments is that when you buy a stock, you buy it FROM another person or institution. That's right, you could be buying stock from someone on your very street that you live on...who just sold it to you. Now, why would someone sell you their stock if they thought it was going to keep going up? That's right, when you buy stock, you MUST assume that the person who sold it to you is an idiot. If you don't want to be that mean, you have to at least politely think that they are wrong, very wrong. Otherwise, the loser in the transaction...is you. If you are wrong, and they are right, then the stock will go down and you'll lose money, and they'll laugh all the way to the bank.
This is where the title comes from. You have to believe that the people who sold you your stock are idiots or you're about to lose money. You're about to lose serious money if you don't have the guts to cut your losses and watch it go to zero. I know these are strong words, but I'm trying to help you avoid seeing your investments go to zero. It means that you have to do your homework. You have to listen to the conference calls. You have to watch CNBC, read books, and read company balance sheets and cash flow statements. You have to do all of that, or someone is going to make an idiot out of you.
Now that you understand how buying stocks works, you can understand how insane it is that everyone insists that Goldman Sachs should have disclosed to the buyer of the Abacus paper that John Paulson was on the other side of the trade. ARE YOU KIDDING ME? Name one time you bought a stock and didn't know who sold it to you. How about EVERY TIME! It happens every day in the market. The only one who knows who is who are the market makers who put the trade together and that's how it should be. Can you imagine if you knew every time who was selling and who was buying? You want to see some real manipulation, try requiring firms to disclose who is on what side of the trade. I have never heard of anything so stupid in my life! Look, everyone has the right to be angry when things are done wrong. Everyone should feel hurt when you're taken advantage of. But this Goldman Sachs case has gone too far. Do you even know what kind of money you MUST have before they'll even deal with you? This was not someone buying the Abacus paper on E*Trade from someone for $7.95 or whatever they charge. The group putting the security together got to toss ANY mortgage out of the SIV (Structured Investment Vehicle) they wanted to! Can you believe that part of it? So, who's really to blame that it went south? I don't see the millions of people who were stupid enough to buy GM stock before it was declared worthless coming out and filing a lawsuit against GM. Jim Cramer told people for months that the GM paper was worthless...but that didn't stop people from trading it.
Just because someone loses money in the stock market, or any other capital market like commodities, options, SIVs, CDOs, RMBS, CMBS, MBS doesn't mean something was wrong or criminal. No one is exempt from doing their homework, especially not people with money who can hire other people to do their homework for them. When this buyer asked Goldman Sachs for the product, they didn't ask their advice on it, they asked them to have someone make the product. John Paulson was willing to do that and go short the product. Who says the IBM you bought today wasn't someone who borrowed the shares and sold them short to you? Heck, you may be the person to sell it back to them when they cover since you have the exact amount of shares they'll need.
Sometimes investments are complicated. Sometimes people lose money. But you always have to do your homework, no matter who you are or what you're buying...and you'll never know who's on the other side of the trade...at least not in a world that's fair. You just have to hope that the person or institution that sold you the investment, is an idiot.
So, the bottom line of the above comments is that when you buy a stock, you buy it FROM another person or institution. That's right, you could be buying stock from someone on your very street that you live on...who just sold it to you. Now, why would someone sell you their stock if they thought it was going to keep going up? That's right, when you buy stock, you MUST assume that the person who sold it to you is an idiot. If you don't want to be that mean, you have to at least politely think that they are wrong, very wrong. Otherwise, the loser in the transaction...is you. If you are wrong, and they are right, then the stock will go down and you'll lose money, and they'll laugh all the way to the bank.
This is where the title comes from. You have to believe that the people who sold you your stock are idiots or you're about to lose money. You're about to lose serious money if you don't have the guts to cut your losses and watch it go to zero. I know these are strong words, but I'm trying to help you avoid seeing your investments go to zero. It means that you have to do your homework. You have to listen to the conference calls. You have to watch CNBC, read books, and read company balance sheets and cash flow statements. You have to do all of that, or someone is going to make an idiot out of you.
Now that you understand how buying stocks works, you can understand how insane it is that everyone insists that Goldman Sachs should have disclosed to the buyer of the Abacus paper that John Paulson was on the other side of the trade. ARE YOU KIDDING ME? Name one time you bought a stock and didn't know who sold it to you. How about EVERY TIME! It happens every day in the market. The only one who knows who is who are the market makers who put the trade together and that's how it should be. Can you imagine if you knew every time who was selling and who was buying? You want to see some real manipulation, try requiring firms to disclose who is on what side of the trade. I have never heard of anything so stupid in my life! Look, everyone has the right to be angry when things are done wrong. Everyone should feel hurt when you're taken advantage of. But this Goldman Sachs case has gone too far. Do you even know what kind of money you MUST have before they'll even deal with you? This was not someone buying the Abacus paper on E*Trade from someone for $7.95 or whatever they charge. The group putting the security together got to toss ANY mortgage out of the SIV (Structured Investment Vehicle) they wanted to! Can you believe that part of it? So, who's really to blame that it went south? I don't see the millions of people who were stupid enough to buy GM stock before it was declared worthless coming out and filing a lawsuit against GM. Jim Cramer told people for months that the GM paper was worthless...but that didn't stop people from trading it.
Just because someone loses money in the stock market, or any other capital market like commodities, options, SIVs, CDOs, RMBS, CMBS, MBS doesn't mean something was wrong or criminal. No one is exempt from doing their homework, especially not people with money who can hire other people to do their homework for them. When this buyer asked Goldman Sachs for the product, they didn't ask their advice on it, they asked them to have someone make the product. John Paulson was willing to do that and go short the product. Who says the IBM you bought today wasn't someone who borrowed the shares and sold them short to you? Heck, you may be the person to sell it back to them when they cover since you have the exact amount of shares they'll need.
Sometimes investments are complicated. Sometimes people lose money. But you always have to do your homework, no matter who you are or what you're buying...and you'll never know who's on the other side of the trade...at least not in a world that's fair. You just have to hope that the person or institution that sold you the investment, is an idiot.
Saturday, February 13, 2010
We Need More Laws...Well, At Least Better Ones
Usually, asking for lawmakers to make laws never happens...at least by normal people. Don't get us wrong, there are plenty of legislators being hounded by lobbyists every day for this piece of legislation or that. But what about good laws? Are there things we could be doing to help this country move forward?
You bet there is!
Recently, we saw Aubrey McClendon (CEO of Chesapeake Energy) and James Rogers (CEO of Duke Energy) go at each other on stage at the Wake Forest University. If you want to see some of that footage, you can check it out right here (courtesy of our YouTube Channel) (Just be sure to turn up the sound on your computer as we're sitting about 10 rows back).
In this video, you'll hear Jim tell Aubrey that he is agnostic about where he gets the fuel to fire his power plants. What? How can that be? Doesn't he want to be clean and green with his power? Doesn't he want to save the planet, lower carbon emissions, and plant trees? Nope...well, at least unless he can plant trees tall enough to hide his nuclear power plants from view. His number one goal is to find the cheapest energy sources that will supply consistent, reliable power to his customers.
Why does he take that stance if natural gas has 50% of the carbon footprint of coal? Because we live in a Pro-Black Lung Coalition world in which the Coal Lobby in Washington is one of the oldest, strongest, and most powerful Lobbying groups out there. They have convinced Washington to create "coal friendly" legislation so that they can keep providing their "heroine" (that's what Aubrey called coal after Jim called natural gas crack cocaine) to utility companies. Until legislation is changed, it is clear that neither Jim Rogers at Duke Energy, or any other energy company CEO is going to change over to natural gas (despite it being cleaner) unless they know that it will be supported by legislation.
Years ago, about 2 decades ago, congress momentarily made it illegal to use natural gas to fire power plants because it was in short supply and they wanted to make sure homes had it available to heat and cook. This event created the opening for the coal lobby that no one has been able to close to this day. Coal is cheap, abundant, and it offers the "unicorn myth" that one day we can do CCS (Carbon Capture and Sequestration) and make "clean coal".
Well, while that has never happened yet, we are getting natural gas out of shale properties all over this country from Texas to Pennsylvania and in plenty of places in between. There is said to be around 100 years of natural gas in the shale formations in the US...enough for us to run everything off of natural gas until we can make the switch to wind, solar, and water. You can read more about this from The PickensPlan, just click on the link.
Also, you can watch the videos below, which break down what we saw take place between Chesapeake Energy (CHK) and Duke Energy (DUK) at the Energy Conference.
While it's certainly up to us to learn more about the different fuels and their use in providing us with power; one thing is for sure, until legislation allows "fracking" or horizontal drilling explicitly, no matter how clean natural gas may be, power companies will not use it to fire power plants until the legislative uncertainty is removed.
The other thing that is very clear now, is that our Country needs a new economy. We think it has to come from Energy or Technology. Health Care is already 1/6th of our economy. The Service Sector is huge right now. The Defense Sector can grow in terms of preventing Cyber Warfare, Anti-Virus, FireWalls, X-Ray Machines, Full-body Scanners, etc. But, in order to get us back to anywhere close to a 5% unemployment rate...we're going to need to create a new economy. We can't simply put more people to work doing what we already do as a country because businesses will not give up the productivity they currently enjoy. Profits are getting better and better. The last thing corporate America wants to do now, is to go back to declining profits. That means we need a new Energy Economy and we need the help of legislation to set a long term energy policy for our country.
It doesn't have to be perfect, but we need to lay out the case for how different fuels will be used over time. A longer term energy policy will give CEOs enough certainty to make decisions that will take 5-7 years to implement. Jim Rogers stated that he will replace every single plant he has right now in the next 40 to 50 years, every plant. Can you imagine the jobs that would create today if CEOs had a blueprint for the future of legislation. We have heard for weeks on CNBC and other channels that legislative uncertainty means that companies will hire less and spend less. Well today, Aubrey McClendon and James Rogers just proved it.
Please contact your congressperson and senator today to let them know that we need to remove legislative uncertainty and get started putting people back to work.
You bet there is!
Recently, we saw Aubrey McClendon (CEO of Chesapeake Energy) and James Rogers (CEO of Duke Energy) go at each other on stage at the Wake Forest University. If you want to see some of that footage, you can check it out right here (courtesy of our YouTube Channel) (Just be sure to turn up the sound on your computer as we're sitting about 10 rows back).
In this video, you'll hear Jim tell Aubrey that he is agnostic about where he gets the fuel to fire his power plants. What? How can that be? Doesn't he want to be clean and green with his power? Doesn't he want to save the planet, lower carbon emissions, and plant trees? Nope...well, at least unless he can plant trees tall enough to hide his nuclear power plants from view. His number one goal is to find the cheapest energy sources that will supply consistent, reliable power to his customers.
Why does he take that stance if natural gas has 50% of the carbon footprint of coal? Because we live in a Pro-Black Lung Coalition world in which the Coal Lobby in Washington is one of the oldest, strongest, and most powerful Lobbying groups out there. They have convinced Washington to create "coal friendly" legislation so that they can keep providing their "heroine" (that's what Aubrey called coal after Jim called natural gas crack cocaine) to utility companies. Until legislation is changed, it is clear that neither Jim Rogers at Duke Energy, or any other energy company CEO is going to change over to natural gas (despite it being cleaner) unless they know that it will be supported by legislation.
Years ago, about 2 decades ago, congress momentarily made it illegal to use natural gas to fire power plants because it was in short supply and they wanted to make sure homes had it available to heat and cook. This event created the opening for the coal lobby that no one has been able to close to this day. Coal is cheap, abundant, and it offers the "unicorn myth" that one day we can do CCS (Carbon Capture and Sequestration) and make "clean coal".
Well, while that has never happened yet, we are getting natural gas out of shale properties all over this country from Texas to Pennsylvania and in plenty of places in between. There is said to be around 100 years of natural gas in the shale formations in the US...enough for us to run everything off of natural gas until we can make the switch to wind, solar, and water. You can read more about this from The PickensPlan, just click on the link.
Also, you can watch the videos below, which break down what we saw take place between Chesapeake Energy (CHK) and Duke Energy (DUK) at the Energy Conference.
While it's certainly up to us to learn more about the different fuels and their use in providing us with power; one thing is for sure, until legislation allows "fracking" or horizontal drilling explicitly, no matter how clean natural gas may be, power companies will not use it to fire power plants until the legislative uncertainty is removed.
The other thing that is very clear now, is that our Country needs a new economy. We think it has to come from Energy or Technology. Health Care is already 1/6th of our economy. The Service Sector is huge right now. The Defense Sector can grow in terms of preventing Cyber Warfare, Anti-Virus, FireWalls, X-Ray Machines, Full-body Scanners, etc. But, in order to get us back to anywhere close to a 5% unemployment rate...we're going to need to create a new economy. We can't simply put more people to work doing what we already do as a country because businesses will not give up the productivity they currently enjoy. Profits are getting better and better. The last thing corporate America wants to do now, is to go back to declining profits. That means we need a new Energy Economy and we need the help of legislation to set a long term energy policy for our country.
It doesn't have to be perfect, but we need to lay out the case for how different fuels will be used over time. A longer term energy policy will give CEOs enough certainty to make decisions that will take 5-7 years to implement. Jim Rogers stated that he will replace every single plant he has right now in the next 40 to 50 years, every plant. Can you imagine the jobs that would create today if CEOs had a blueprint for the future of legislation. We have heard for weeks on CNBC and other channels that legislative uncertainty means that companies will hire less and spend less. Well today, Aubrey McClendon and James Rogers just proved it.
Please contact your congressperson and senator today to let them know that we need to remove legislative uncertainty and get started putting people back to work.
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