With this current investment environment, there are still some stocks with negative enterprise values. Enterprise value is market cap = total debt - excess cash. I’m currently looking at QLTI, FACT, TRID, TSCM.
He is an article on negative enterprise value. http://www.covestor.com/mbr/jjun0366/blog/29812. The returns has been impressive. I think negative enterprise value stocks give investors a margin of safety, especially when a firm has a lot of cash.
Disclaimer: I am long TRID.
This is the next stock on my buy list. Its business is a mix of medical insurance and brokerage and investment services. The company is a very low beta of .30. I think this holding is good for people who not like a lot of volatility. As of 1Q 2009, it has grown its eps by 45% from a year earlier. At 7 times earnings, 1 times book value and with with no long term debt, this company has a lot of upside and with less risk.
I bought 980 shares of United Rental (URI) at $5.10 this morning.
URI is a small cap (300 MM) company that rents construction equipment to various business as their main source of revenue (76%). The rest of the 3.3 Billion revenue comes from New (6%) and used (8%) equipment sales, contractor supplies (6%) and services (4%).
From a relative valuation standpoint, URI looks very cheap relative to the industry and it’s historic past.
P/S = .11
P/EBITDA = .65
Proforma Price/E = 1.9
P/CF = .52
I think this company scares a lot of people because it has a lot of debt. (3.3 billion). The good news is that the company does not have to start paying its debt back until 2012. URI has positive free cash flow, so it is not bleeding money away.
The other big concern is that the recession is hurting construction companies and the economy. This has affected the rental rates. Rental rates have gone down and there are fewer rentals and sales. But sales has not decreased a lot because companies are also more likely to rent equipment than spend the cash on buying and storing equipments such as bulldozers and scissor lifts.
URI has responded by closing down inefficient branches and laying off more than 1,000 people out of their 10k workforce.
Once the economy picks up, URI will be in a great position to capitalize.
I just finished Fortune’s Formula by William Poundstone. I’ve learned about the Kelly Criterion from various websites and books, but never knew how effective it can be. This book shows how Ed Thorp used the Kelly Criterion to manage his money in Black jack and Roulette to the stock market. The formula is odds/edge.
This is the formula from Investopedia with some explanations.
The only problem with the Kelly Criterion is that it is volatile, so some people use a portion of the Kelly Criterion, such as 1/2 Kelly Criterion. I plan on using the Kelly Criterion on my individual stock investments. It will be a fractional amount of the formula. Here is a website that uses the Kelly Criterion for stock investments with multiple outcomes.
I finally finished The Only Three Questions that Count by Ken Fisher. It is one of my favorite investing books because it teaches the readers how to develop their own strategy. It shows people how to ask questions, to challenge common knowledge, and to think for themselves.
Here is the strategy that is discussed in the book.
1. Choose a benchmark based on your time horizon, income needs, liquidity, and unique needs.
2. Match the market weightings in the proper sectors and countries.
3. Only deviate from the benchmark (pursue benchmark risk) if you know something others don’t.
Use funds (index funds, ETFs) if the porfolio is small, otherwise, stocks are cheaper to hold. There was no discussion on stock selection because they only account for 10% of the returns in the market. The other 90% is mainly asset allocation and sub-asset allocation (country, sector, capilization (big vs small cap) and valuation (value vs growth).
This book really made me think about how I approached the market. I was more of a bottom up investor, but now that I’ve read this book, his strategy seems to make a lot of sense.
I will try to develop new capital market technologies ( anomolies ) to see if I can uncover something new.
There has been a lot of buzz about Jon Stewart. It started with a rant about CNBC’s lack of responsibility.
Cramer then complains that Stewart wasn’t being fair, so Cramer was invited on the show.
Cramer and CNBC got owned on the show. Some may say that Stewart was being unfair. Since it is his show, he had time to research and take video clips out of context, but I thought his arguments were valid and his attacks well justified. Also, he destroyed those 2 guys (Carl Tuckerson) on Crossfire about 5 years back on CNN. They shortly cancelled the show 3 months after.
Cramer was very apologetic and sorry looking. He didn’t argue back and admit his mistakes, saying he was betrayed. At least he owned up to his mistakes.
Jon Stewart is now my new hero.
By Loi Tran
Here’s an article that shows why index funds are still the best long term solution for taxable accounts.
Although manged funds and hedge funds have higher pre-tax returns - taxes take a huge chunk of the gains making after-tax returns lower. Based on Morningstar’s research, only 3 out of 100 funds will outperform the S&P index on an after-tax basis.
Best strategy I can think of is to increase contributions in recessions to get the bounce when the market rebounds. I have taxable mutual funds too. I have some money invested in American funds and Oakmark. To be honest, they’re doing similar to the indexes. (Just as poor) All my money in my 401k is invested in index funds. And they’re down 42%. So there’s nowhere to escape as of now, but keep on investing and we’ll be rewarded in the long run.
That is a common phrase people will say when they open their latest 401k statements. It is shocking. Not checking 401k everyday is a good thing. But don’t avoid looking at your account because you’re scared. Looking at your account from time to time can help you assess your risk tolerance and rebalance your portfolio when the time comes. (I recommend once a year)
Here are some reasons why people are surprised at the large losses they incur.
1. They underestimate risk. People were too aggressive. During good times, people over estimate returns and have more money in equities than they can handle. I know I did. I was leveraged at the peak. At least I was investing for the long term, so I have time to recover. But the lesson I learned is a very painful one indeed. It will take a long time for me to recover. I never expected the worse-case scenario to appear.
2. Not diversified enough. Being diversified may have helped a little bit in the previous bear markets, but not in this one so far. All equity asset classes were hit hard. But bonds held up okay, so if you were diversified between cash, bonds and equities, you would have less downside vs someone like me who was over 100% equities.
The good news is, most of the pain is hopefully over. We are near a bottom, and the future expected rate of return looks better than other. Tune out the media who are too short-sighted to see the attractive opportunities out there. Invest more now than you normally would and you will be happy you did in 5 years.
By Loi Tran
Here are my three ways to earn a higher investment return. Avoiding mistakes are more beneficial to an investor’s return than scoring home runs, which do happen on occassion, but are negated by even bigger mistakes. People will only remember their winners and forget their losers. It’s done unconsciously to protect the ego so that they can continue on investing.
1.) Lower the amount of fees you pay.
This includes trading less, having lower management fees (expense ratio) and more tax efficient strategies (tax loss harvesting, low turn over mutual funds, using index funds, tax shelters (401k, IRA, Roth). That 1% management fee does not seem like much, but over 20 years, the difference in ending market value can be as much as 50% or more.
2. Stay invested.
Trying to time the market will only lower your returns and make you regret the bad decisions you have made. No one can consistently time the market in the long run. Do you see a lot of rich day traders around? Move to cash now cause make you miss out on the unexpected rebound that will be sure to come.
3. Spend more time researching and less time checking price quotes. I am guilty of checking the prices on my holdings everyday. It is a waste of time. Instead, I can and should be using this time to do some fundamental research.
4. Stay diversified globally. Invest globally, in small, mid, and large cap stocks. It doesn’t have to be complicated. A world stock index fund from Vanguard (VHGEX) will do the trick for those who are lazy.
Utilizing these tips will definitely earn you a higher return in the long run. They are common sense tips that will work if applied, but most do not.
I’m sick of hearing predictions on the news, in articles, on blogs, and on CNBC. When will people give up on predicting what will happen in the stock market. There are too many variables and the stock market is mostly efficient. It is especially the short term predictions (3 months - 1 year) that are laughable. Most pundits get it wrong over half the time and rationalize their mistakes. Behavioral finance explains a few of their tricks they use.
But I think it is possible to get some longer term predictions right. The Three Questions that Count showed me that it is possible. So have we reached a bottom? I think we’re near one. And it’s a great time to be a long term investor. If I’m wrong and it’s the end of the world, I still have nothing to worry about.
By Loi Tran
