Investing Guide

Put options are a derivative (derives its value from a stock) of a security that gives the owner of the option the “option” to sell the stock at the specified strike price.  

There are 2 sides of a transaction with a derivative such as a put option.  There is the writer (seller of the option) and the buyer (owner) of the option.  

Owners of put options are basically betting that a stock will go down in price.  For example, when someone buys an October (Oct 16th, 3rd Friday) put option for Apple stock with a strike price of 185 for $5.25, they’ll be in the money when the stock of Apple drops to $179.75. These are American options and can be sold early, so money can be made even if the Apple is above 179.75 if there is a large time premium left. Prices can change dramatically due to leverage.  If the stock never drops down to the the strike price at expiration, the put options expire worthless and the owner is out $5.25 X 100 per contract = $525 per contract. 

The writer gets a premium for selling the option, but has unlimited risk until expiration because a stock can go up to infinity.  People sell puts to earn extra income on stocks that they already own. 

My advice is to use put options to hedge your portfolio if you have a large portfolio and do not want to deal with the tax implications of selling.  Otherwise, gambling with options is a zero sum game and your timing needs to be impeccable to make money.  Some people make money off options, but it is difficult.  Most make money in the short term attribute it to skill, but will later get burned.  There are not a lot of successful options “investors”  for a reason. 

I’m a long term investor and speculate with derivatives.  You can be right about a stock price drop, but if your timing is off, you can still lose a lot of money.  You need to have good timing when buying options.  It’s hard to predict price movements in the short term. 

Here is a link to investopedia on exercising put options.

If you want a micro cap, high cash($2.33 per share), low price to tangible book (.82) value stock, look no further than RFIL.

Here is a company description from the S&P report.

“RF Industries, Ltd. (RFIL) provides interconnect products and systems for radio frequency (RF) communications
products and wireless digital transmission systems. The company classifies its operations into the
following six divisions: the RF Connector and Cable Assembly division; the Aviel Electronics division; the
Worswick division; the Bioconnect division; Neulink division and the RadioMobile Division.

The Connector and Cable division is engaged in the design, manufacture and distribution of coaxial connector
solutions for companies that design, build, operate, maintain and use wireless voice, data, messaging,
and location tracking systems. Coaxial connector products consist primarily of connectors which,
when attached to a coaxial cable, facilitate the transmission of analog and digital signals in various frequencies.

The Aviel Electronics division serves the microwave transmission industries, and is an approved vendor to
aerospace, electronics, OEMs and government agencies in the U.S. and abroad. Aviel provides additional
custom design capabilities, expanding the company’s products in the military and commercial aerospace
markets.”

The stock has been performing poorly over the past year returning -47%.  This gives us investors an opportunity for a good entry point.  The company has 25% insider ownership, which is always a good sign.  There is no analyst coverage as well.   It has been beaten up due to the poor economy, but will have no trouble weathering the storm due to its 0 debt and positive operating and free cash flow.   The sales drop was also lower than its competitors.  It’s a good long term buy at 4.20$.

I just bought shares of Forward Industries Inc for 1.53$.  This company mainly sells carrying cases (75% of revenues) for diabetes machine.   I got the idea from Greenbackd.

I bought some shares at $1.53.  This is another negative Enterprise value stock purchase.  The company’s market cap is 12MM with an enterprise value of -6MM.  There is $2.40 in cash with no debt. 

The company has been losing money for the past few years.  There’s a cash burn of over 1 million dollars. 

The potential catalyst include improvement in the economy and share repurchase.  The company may be taken over, but it has an anti-takeover policy which would make it difficult.  

Risk include a poor acquisition that burns through most of the cash, or increase in operating losses due to the economy or change in customer.  Overall, I think the company has a good risk/reward profile.

Current holdings include:

ALG, EGY, FORD, MHJ, PRGN, RJET, SGI, TRID, TWIN, ULTR

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 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