Investing Guide

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.

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

I’ve been reading Aswath Damadaran’s website with my free time.  I came across a very interesting article on Beta vs. Margin of Safety.  That article basically describes the difference in using Beta vs. Margin of safety as a proxy for risk.  Beta measures the covariance of an asset vs. the market.  It shows how sensitive an asset is compared to the overall market. 

The introduction quoted Warren Buffett saying:

Vanguard recently released its new Total World Stock Index Fund. (ETF ticker VT, index mutual fund ticker: VTWSX).  The allocation would be 59% international and emerging markets with the remaining 41% in US stocks.  The expense ratio for VT will be .25%.

I’m a fan of all in one investments.  They keep life simple for those of us who do not want to bother rebalancing their portolios. 

Previous options include investing in separate Vanguard index funds in varying proportion depending on age and risk tolerance:

Total Stock Market Index

International stock market Index

Total Bond Index

Then an investor can rebalance periodically to bring the allocation back to the target allocation.

Another option would be a Vanguard Life Cycle Fund.  I’m also a big fan of life cycle funds that will do the automatic rebalancing as a person ages.  These funds of funds are efficient, cheap and simple to own.

One stop investment funds are great.  Investors can focus on saving more money to add to their investments instead of doing research that will probably not help them in the long run.