Rule #1 Investing Spreadsheet / Calculator Resurrected! Version 1.5

It took almost 10 years for me to update the Rule # 1 Investing spreadsheet/calculator (and to write a post on here).  I doubt any of you reading this have ever followed this blog...so welcome!  Take a quick peek at my first post to give you an idea of what this blog is about.

Let's not belabour the origin of this blog; you're here for the Rule # Investing spreadsheet.  I had neglected the sheet for quite some time, because to be honest, I had grown beyond the methodologies of Rule # 1.  Don't get me wrong; I absolutely have Phil Town to thank for my tremendous success in investing (maybe that will be the focus of another post), especially in the last 5 years.  Rule #1 was a great start for me as a beginner.  As I matured in my investing journey, I've picked up other lessons as well and have relied less on the structure of Rule #1.

That said, the next phase of my investing journey is going to focus more on coaching, since my oldest is now 14 years old and, to my great joy, have expressed an interest in investing her own money.  This is why I have now updated the Rule # 1 spreadsheet so that she and all of you can benefit from it.

I hope this will be useful to you!  Leave a comment!

Rule #1 Investing Spreadsheet / Calculator Version 1.4.2

Update: There is a new version of this sheet.  Find it here!

Thanks for a number of readers for informing me of the significant changes that was made at MSN Money (the source of much of the stock data on the previous version of my Rule #1 Investing Spreadsheet).  10-year data is no longer available there.  As a result, I had to quickly scramble to find another source.  What I found was www.gurufocus.com and the 10-year data that it has is pretty amazing.  Therefore, I was able to revive my spreadsheet fairly quickly.

If you only use the first few tabs of the spreadsheet, you will see very little changes.  The only real change is that Canadian stocks are no longer supported (boo hoo...).  I suspect it would impact a small portion of us Canadians, but I'm mainly invested in US stocks anyway...

Anyway, you can find the new version here: http://goo.gl/GS3RyI .  As usual, to be able to use the sheet, you'd need to click on File > Make a Copy to create a copy for yourself.  You will need a Google account for this.  Cheers!

For reference, read my last post on the spreadsheet.

Rule #1 Investing Spreadsheet Version 1.4.1

Update October 7, 2014: Spreadsheet has been updated.  See http://goo.gl/KEm3ar

Hello Readers!  If you've been following me previously, then I must thank you for your loyalty, because my last personal post was written more than 2 years ago!  It's funny how priorities change very quickly in life.  Well, the word "idle" definitely doesn't describe my life over the past 2 years!  Anyhow, I'm glad I actually got around to writing this!

And if it's your first time to this blog, please take a look at all of my older posts...the last 2 years have proven that my wisdom, albeit finite, is not so bad after all.  Do click around and if you like what you see, please subscribe and/or follow (see navigation bar on right)!

Sorry, back on topic.  Although I paused blogging for a while, I definitely haven't stopped investing.  I've also made some tweaks to my Rule #1 Investing spreadsheet.  I give you Version 1.4.1: http://goo.gl/JlQYt4.  In order to use this sheet, you will need a Google account.  Once you're logged in to Google, click on File > Make a Copy and you're good to go.  You now have a copy of the spreadsheet in your Google Drive.  Feel free to make any modifications as you see fit.

Just a quick note of how to work the sheet.  In the "Stock" tab, you will see a "User Inputs" section on the left.  This is the only place where you should be typing in stuff.  Leave everything else alone if you just want to use the sheet as is.  Type in the symbol, select the country, type in any overriding inputs (e.g. estimated growth, etc.).  As soon as you type something, the sheet will automatically update.  It shouldn't take any more than a couple of seconds.

As a final note, I've been using the Fischer valuation model quite a bit and I like it over the Rule #1 model.  You can read all about it here: http://seekingalpha.com/article/960381-shhh-my-secret-valuation-model-revealed.

Have fun investing!  And write me a comment if you get a chance!

Property “Flipping” That’s Good for the Soul

Below is a guest post by Frank Bateson.  This is a continuation on our discussion on real estate investing.  If you would like to write a guest post, please contact me.  Click on the About Me link for my contact info.

Frank Bateson is a retired appraiser who is now dipping his toes into blogging. He is considered an expert on Windham NY real estate.  When he's not plugging away at his keyboard, Frank enjoys tracking the stock market and lowering his golf handicap. 

When the great subprime mortgage crash broke in the fall of 2008, I doubt there was anybody working in real estate, banking and finance, development, construction and contracting or any related fields (which means just about everybody) that didn’t feel at least a little sick. For many of us that sensation was the result of several concurrent reactions: anxiety/fear/panic, bewilderment, a mistrust of government and private sector financial prognosticators and experts, apprehension and insecurity about the future, and perhaps the most pervasive (apart from worry) – anger.

In the months that followed a flurry of blame swept through the media and population in general. Who was responsible? Was it Alan Greenspan and his support of deregulation or his replacement Ben Bernanke’s failure to see it coming? Was it President G.W. Bush for likewise backing and pushing deregulation or supporting his Treasury secretary Henry J. Paulson’s 2007 prediction that the subprime crisis was “contained”? Was it the banks and/or Fannie Mae and/or Freddie Mac? Standard and Poor’s, Moody’s and the other rating agencies’ apparent good-ratings-for-profit racket must have played some role in the collapse, right?

All of these entities and individuals mentioned no doubt contributed to the collapse, of course. However, for months if not years after the crisis there was pretty much a 100% chance that any story you encountered on the Great Recession would inevitably contain or close with a high-handed critical rebuke from the story’s author that really, when you got down to it, we were all to blame. If we’d just been a little more responsible maybe we wouldn’t be in this mess. The lion’s share of that blame often seemed to find its way to a particular breed of everyman- the property “flipper”.

Although there are several different subclasses, the species of flipping practitioner most people are familiar with, and the sort that now populates about a dozen television shows (with at least two more reportedly planned by CNBC), is the “fix and flip” artiste. The fix and flipper buys a property listed for less than that property’s value would be if all things were equal. Those unequal things include a house that’s in bad shape or looks like it is, is being foreclosed on, has been seized for whatever reason or often some combination of those. The flipper then fixes the house up and sells it for a profit.

Flippers got a bad rap for a few reasons. They were often considered a predatory symbol of the real estate market’s woes- flash in the pan slicksters who leeched off of honest people by artificially ratcheting up the value of properties that “honest” homeowners would have to pay more for. And unfortunately, there were indeed some scammers who’d work in collusion with each other and either dishonest or inexperienced mortgage brokers, appraisers and loan officers to inflate a property’s real value for shady flipping schemes.
Plus, it’s certainly not unheard of for underhanded hustlers to buy a property with major issues, make some superficial or cosmetic repairs or additions and sell a faulty product as a sound one. One of the most common admonitions of the fix and flip investors, however, was that a house just wasn’t a product meant for the making of a quick buck like doing so with other commodities like electronics, clothes, jewelry or even cars. Houses are meant to be homes and long-term investments that pay off when you move.
There’s something to be said for that perspective, certainly. That being said- even nowadays, with the market the way it is, prospective flippers can buy properties and turn them around for a profit without sacrificing one’s ethical deportment, spiritual commitment, moral code or integrity. In fact, when done right, flipping can do a great deal of good while turning a profit. The keys to doing it right is: having patience, being discerning, being honest and forthright with everyone involved in the process and making a commitment to legitimate property improvement.

Once you’ve gotten into property sales that aren’t costing you sleep at night (at least not because of your conscience) you’ll start to see the positive impact a good flip can have on your community and pocketbook. For instance, every successful real estate turning entrepreneur has an established network of subcontractors and maintenance people in their rolodex. That’s a huge link in the profit chain and obviously you’ll want to establish connections whose credentials, work ethic and honesty you’re sure of. Whenever rehabilitating a property everyone you employ in that network makes an honest buck; and an honest buck that contributes to the quality of a neighborhood.

There’s no neighborhood on the planet that would balk at a house on their block being improved. Improving and beautifying any house, particularly if it was something of an eyesore, raises the property values for everyone in the area. Not to mention that a distressed property has been made livable. Finally, and most importantly, when the house is put on the market an individual and/or their family has a home waiting for them.

As my wife and I bought our first house from a flipper, I know exactly how comforting it is to know that the house you’re buying has recently been inspected, touched up, certified, improved upon and often brought up to code. Had my wife and I bought the house as-is before the flippers had and attempted to hire the various contractors, about whom we’d have known little, and/or work on fixing the house’s quirks and shortcomings on our own, I have no doubt that the money we put in (especially if the hours of labor we’d have spent are included) would have been far more than the final closing cost of the house itself. So all in all, house flipping investors saved us money on the house we bought. Not a bad way to make a buck.

What Your Lender Won’t Tell You: Hidden Secrets Coveted by Wise Investors

Below is a guest post by Tiffany Walker.  This is a continuation on our discussion on real estate investing.  If you would like to write a guest post, please contact me.  Click on the About Me link for my contact info. 

Tiffany Walker is a former real estate agent who now enjoys freelance writing.  She primarily focuses on the issue of real estate investing.  When she isn't writing, Tiffany enjoys dabbling in graphic design projects and oil painting.

Mistakes can be looked at as lessons in disguise and true knowledge is gained by either personally experiencing said mistakes or by living vicariously through someone else’s (my preferred method).  Regardless there is something to be said about the way you choose to look at your mistakes as well.  One popular notion that is attributed to this creed might be, “nothing ventured, nothing gained”.  And when speaking about the world of commercial real estate investments, this might be a good way of getting your feet wet in the business.

It’s true, commercial real estate investments offer a wide array of avenues to venture off into and for the savvy investor they can appear to make great choice after great choice, but how is this possible?

Let’s look at a few tips below to help the novice investor get a foothold in the real estate door:

• Lender/Broker: First and foremost are your own finances.  If you are looking to branch out into the investment territory it will mean throwing in a bit of your own monies, whether borrowed or from savings/investments of your own.  Make sure that your own credit is also up to snuff, the last thing you want to have happen is to find an embarrassing or unknown blight on your report.  Being declined for your first loan is hardly an ideal way to get your investments tools in gear.  After speaking with colleagues and acquaintances, try to get a few names for potential brokers/lenders.  After all, having someone recommended by a trusting friend, might be reason enough to set up a meeting.  Make sure to have at least three candidates, it wouldn’t hurt to hear about other’s track records and approaches when it comes to investment opportunities.
• Real Estate Hunting: Yes, you might go the realtor route, or you could get in the hunt yourself, sometimes hitting the classifieds and just walking through your target neighborhood can sometimes reveal that hidden gem.   Keep your ears open, you never know when a deal could literally fall on your lap, a friend of a friend could be in dire straits and wanting to unload a property quickly, but you’ll never be able to get in there without a little effort on your part as well.
• Be Determined: Sometimes the difference between your bid and the next guys is persistence.  Be willing to work and compromise to make a deal that was heading south, climb out of the frigid waters of Failures Ville and into the calming pools of success!  And sometimes you just have to learn to walk away.  As a savvy investor, you will soon have the ability to pick up on properties that are worth the extra effort.
• Tricks of the trade: This means having a good list of appraisers and inspectors, reputable people that you can rely upon to give an honest assessment.  If you are at a point that you are considering making an offer on, be smart and above all, patient.  The last thing you need for your profits is to get stuck with a property in dire need of major renovations; repairs you could have potentially avoided had you taken the proper time and techniques for fleshing out riskier investments.  Have a team approach to your investments and make sure you’ve got all areas covered, from finances and assessments to contractors and agents.

At the end of the day, purchasing commercial real estate can be a worthwhile opportunity to watch your saving grow and be an active participant in your own investments.

Be smart, patient and persistent.

Best Practices For Investing In Real Estate

Below is a guest post by Doug Chapman from HomeDaddys.  As I mentioned in my previous post, real estate investing is a viable way of making good money; this post will give you some more insight on that topic.  If you would like to write a guest post, please contact me.  Click on the About Me link for my contact info. 

When you are thinking about buying real estate, it sometimes gives us all a little bit of an uneasy feeling of whether or not the investment is going to be profitable or not. It isn’t just about buying your dream home anymore; it has become something that many people have done on the side to make an investment both personally and professionally for their future.

I’m at stay-at-home dad but I also do real estate investing on the side, so I have direct knowledge of what are the best ways to go about investing in real estate. It is more complicated than we all think, but it also has the chance to make profitable gains. Don’t get me wrong, there are risks involved and not everything will always pan out, but if you follow the right guidance there is a chance for success.

When I first started an investing real estate gig on the side to help provide more financial support for my family, I got to pick the brain of Del Walmsley, who is big in and around the Houston area after he successfully made his real estate investments a major success in a very short amount of time. His advice, along with hours and hours of research online and in print, got me to where I can confidently speak about what the best practices are for investing in real estate.

Investments as a Rental Property:

This is pretty much the most common practice of investing in real estate. If you buy the property and are the landlord, you obviously are in charge of paying the mortgage, taxes and upkeep costs of maintaining the property. However, being the owner, you will charge enough rent to make up for the costs of these mentioned items as well as possibly making a small chunk of change above the monthly costs for general maintenance. One method that typically works though for the long-term investment is to exercise patience, charging the bare minimum at first to cover the definitive costs of the property and wait until the mortgage is paid off. At that time, the most profits come into play because not only will the property have upped it appreciation value over time, it will also have stood the test of time where it will be a more established property down the road.

However, there are risks as well that you will need to take it upon yourself to manage properly. The amount of time you invest into the property may become a factor, maintaining it appropriately to get the most of the investment. And you need to make sure you always have a tenant, because if not your monthly value cash profit diminishes. A good marketing plan is needed to ensure you always have a tenant, and a property manager, whom you would have to pay, can easily take on the basic upkeep and maintaining of the rental property.

In-Depth Knowledge of Property Investments:

This all sounds fine and dandy in taking the calculated risk of making profits on investing in real estate, but you need to make sure that you don’t just jump into the process before doing all of the proper research. And I’m not talking about just leafing through the internet and reading a few articles. I’m talking about gaining the expertise that will be necessary in making the most off of your investment. This includes understanding the laws and regulations of managing a property, as well as having someone who is already in the business in your back pocket to guide you along. Too many times people that have a few extra bucks and want to instantly try making a profit on real estate investing, and they turn out to have major financial losses because they didn’t do the diligent work on the front end to help in the long run.

                                             

You need to know whether you want a residential property compared to an office space, industrial or retail. There are so many minute details to each separate property that you want to make sure you focus on just one of the potential properties, rather than trying to explore many different options, at least from the start.

Investment Groups:

When you join an investment group, you are placing your property into a pool of investments with other investors, allowing the company who operates the investments run the many different properties among your group. This might alleviate the hassle of the daily/monthly upkeep of the property that you personally are invested into. The company will do the dirty work and take a portion of the profit, but by being in the investment group it takes away the pressure of having vacancy in your property while still making enough profit to survive in the short term.

In the investment group, members typically work together to understand the current market trends and how to best maximize the profits from them. The group also allows members to become more and more familiar with how to manage your property best, and you also tend to gain extensive information about investment practices.

To conclude this brief, Cliff Notes version of investing in real estate, please make sure you realize that there is definitely a ton of potential in investing, but you need to make sure your decisions are based on what you’ve learned throughout proper research rather than just making a knee-jerk reaction. Your profits will benefit greatly by taking the extra time to learn exactly what the ins and outs of investing in real estate are.

Author:  Doug Chapman is a staff writer for HomeDaddys, a stay at home dad blog.  He specializes in diapers and sippy cups, but is a successful real estate investor on the side. 

Investing in Real Estate: How Does It Compare to Stock Investing?

For those of us who are on Canada, the value of our condos and houses was left luckily unscathed after the Great Recession.  In fact, the prices took a breather during those dark days and continued its upward trajectory shortly thereafter.  As an example, the value of the townhouse we bought back in 2006 gained about 30% in value by 2011.

If we factor in the leveraging effects of owning a mortgage, my return of investment would have been about 100% in 5 years.  That's about 15% per year, not a bad investment at all!  Naturally, the question that gets frequently asked is whether investing in real estate or in stocks is more profitable.  Obviously, circumstances play a big role, but in general, which gives better returns?

Was the Last Decade a Particularly Good Decade for Real Estate in Canada?
Most of us have very good short term memory.  In fact, we tend to extrapolate scenarios to predict future events.  Tell me that you've never looked at a stock chart and extrapolated the line to see where the price would be 6 or 12 months in the future!

Here at The Catholic Investor, we look for hard and fast data to back up our claims.  I'll use a website that I frequently visit to obtain this data.  It's the Toronto Real Estate Board website at http://www.torontorealestateboard.com/.  They publish, on a monthly basis, a summary of the transactions made in the prior month.  They also show the average price of homes in the Toronto Area for the past 45 years on a yearly basis.

If we look at the long term trend of the Toronto house prices (i.e. from 1966 until 2011), the average home price has grown from $21,360 to $465,412.  This translates into an annual growth of 7.1%.  Although it feels like the last 15 years have been exceptional in terms of real estate price appreciation, the fact is the average annual growth was only 5.9% per year during this period.  Looking at Figure 1, where housing prices are plotted on a log scale, we can readily see that the past 15 years have actually been pretty average.  On the other hand, housing prices went through the roof in the late 1980s and quickly came back down in the early 1990s.

Figure 1: Average GTA Housing Prices Over the Last 45 Years

So, the conclusion I will draw is that the last one and a half decade had been pretty average in terms of housing price appreciation.  Perhaps it was because of the downturn in the early 1990s that made the last decade seem like it was too good to be true.  That's just not the case.  In some major US cities, housing prices doubled between 2003 and 2006, during the peak of the housing bubble.  That translates to approximately 20% growth per year.  We were nowhere near those numbers in Toronto.

Free Money?
There is a common strategy in real estate investing that can increase your growth and that is rental income.  If you are one of the few people who can afford to buy a second piece of property and rent it out, it seems like it's a no brainer.

In Toronto, a typical 1-bedroom condo apartment typically costs around $250-350K, depending on location, amenities, etc.  That same condo unit can fetch around $1000-1500 per month in rent. After deducting property taxes, maintenance fees, one has about $600-900 left per month, which would be enough to cover the payment of a mortgage if one had put 25% down payment and a 25 to 30 year amortization in a mortgage.  It's essentially free money, as they say!  The unit is self sufficient and as it grows in value, so does one's net worth.  One assumption, and a big one at that, is that mortgage rates would remain relatively low.  If mortgage rates were to rise, one may have to put money into the investment as rent would not be able to cover the expenses.

So, what do the numbers looks like if we were to buy a condo unit and rent it out today?  Let's say we buy a 2-bedroom unit for $400K and we rent it out for $1500.  I'm a little conservative on the rent, but let's see what we get.  Assumptions made are also shown below.  The one thing that I want to point out is that I have not factored in inflation into the mortgage payments.  Since the mortgage payments are locked in and do not rise, they effectively get cheaper and cheaper in the future as prices of everything else rises.  As for the monthly rent and taxes/fees, they would likely rise with inflation.  So, the present value of these would be whatever they are currently.  If I've lost you on this...not to worry, in the end, the annual growth would only deviate by a percentage point or so.

I've used 4 different scenarios.  The first is an optimistic one where variable mortgage rates would remain at around today's rates for the next 10 years.  The second is a very realistic scenario where one can get a 10-year fixed mortgage at 3.8% (this is available today and is likely a smart move if you were to lock in today for 10 years).  The third is a pessimistic scenario where the average mortgage rate is seen to be at 6.5%.  The last is if we had purchased the property outright from the start.  The average return per year are 13.5%, 11.7%, 8.2%, and 9.6%, respectively.  Not bad at all!  In fact, it's a pretty good investment, especially since I had used a quite conservative rental income.




What's the Catch?
From the scenarios above, it does seem like investing in real estate is free money.  As we know, there's no free lunch in this world, what's the catch?  There are a number of disadvantages with real estate investing that  do not exist with investing in stocks or funds.  They include finding renters and collecting rent, work in maintaining the property, using the "room" that you could have used in buying a bigger house for yourself, etc.  However, the biggest catch is quite apparent, especially to home owners across the border, in the United States.  They would quickly tell you that the housing bust of 2008 wiped out a huge portion of their net worth.

By owning a mortgage, one is essentially leveraging up on the investment.  By taking advantage of the low mortgage rates (Scenario 1 and 2), we were able to increase our returns.  But as we can see in Scenario 3, if the rates rise, it actually hurts us to borrow.  In any case, because we are likely not able to buy a property outright from the start, we would have to leverage up.  It's great when the market goes up, but if we see a repeat of the US housing market in 2008 here in Canada, it would be disastrous.  Let's say the market goes down 20%...doesn't sound too bad, right?  Wrong.  In our case, 20% of $400K is $80K.  We put down $100K initially.  So, if we were to sell the house right there and then, we would have banked a -80% return!  Yikes!

In fact, this is the main reason there are so many foreclosures in the US.  It's not that people could not afford the mortgage payments, it's because the house value has dropped so much that it makes no sense to keep paying the payments because the home owners are so deep in the red.  So, the biggest risk in real estate investing is a housing market downturn.

So Which Is Better?  Real Estate or Stocks?
It is true that the real estate market is less volatile than the stock market, but it is also important to remember that volatility does not equate to risk.  While some may argue that real estate investing is safer, a much longer debate is required for that topic.  Here's the summary for real estate investing: 1) it takes more work (renting out, etc.), 2) there is less volatility, 3) if you own a mortgage, in the less likely event of a market downturn, your losses are amplified.

As for stocks, since most people do not buy on margin or trade options exclusively, the leveraging effects are not as large.  Individual stocks and even the market in general are more volatile than the real estate market.  However, if you know what you are doing, you may be able to capitalize on this volatility.

In the end, it's about your comfort level.  Most people feel safer with real estate, because of its tangibility and the notion that people always need to live somewhere.  Fair enough.  However, if you look at the richest people on the planet, a large majority got there by owning awesome businesses, and only a handful got there through real estate.  I believe that speaks volumes.  As such, I'm still a stocks kinda guy!

The Catholic Investor Gets Interviewed!

In the Greater Toronto Area, we are very fortunate to have a very vibrant Chinese Catholic community.  There is even a Chinese Catholic television program, called Fountain of Love and Life (FLL), that produces its own TV programs.  I was so very honoured to have been invited to do a little sharing in one of the upcoming episodes on this blog!  I actually just came back from the interview.

On it, I talked about ethical investing and the USCCB investing guidelines.  I also mentioned that one of the biggest pleasant surprises I've had were the readers (yep, that's you!) who have reached out to me and contacted me to say hi.  Among you, there are Catholics, Protestants, and non-Christians, and I felt that this blog was a means of evangelization and ecumenical dialogue.  So, thanks to the Lord's grace and you, I'm still writing on this blog!  Feel free to drop me a line.  You can add me on Google+ (right side of this page) or email me.

If you are interested, you will likely be able to view the episode here: http://fll.cc/index.php/fll-tv/online-tv.  Unfortunately, the program is in Cantonese and has no English subtitles.  But at least you get to see my face!

I also wanted to thank all the staff at FLL for inviting me!  It was a blast!  God bless!

Causality or Simply Correlation: Does the Stock Market React to Real World Events?

When you read the headlines of the day, you'll quickly note that every movement of the stock market or a particular stock can be explained by some thing that is happening in the world.  " Dow drops 237 points as fears of Greek default intensifies," or "stock futures rise as housing market bottoms"...etc.  At times, it appears that the two do correlate.  When the economy is doing well, the stock market goes up.  The questions I would like to pose are: Do real world events cause movements in the stock market?  Or is the reverse true?  Or are they simply correlated without real cause-and-effect?

Bathrooms and SAT Scores

Before I give you my thoughts.  Let me give an example that I read somewhere.  It could have been Freakonomics (interesting book, by the way), but maybe not.  In any case, it was said that SAT scores of highschool students in the US had a high correlation to the number of bathrooms they had in their house.  That seems kind of silly, doesn't it?  Thinking a little deeper, it actually makes perfect sense.  Which kids have many bathrooms in their house?  Kids with a big house.  And who owns big houses?  Those from affluent families.

As further research shows, students from affluent families often perform better than their counterparts from a more modest background.  The causal link is between family affluence (or better yet, the environment provided by an affluent family) and SAT scores.  Since there is high correlation between affluence and number of bathrooms in the home, there is also high correlation between number of bathrooms and high SAT scores. 

One of the dangers in this situation is creating a stereotype that kids with lots of bathrooms in their house will perform better in school.  The larger problem, however, is asserting a causal link between number of bathrooms and high SAT scores.  A parent, learning of this correlation between number of bathrooms and high SAT scores, may mistakenly decide to spend money putting in new bathrooms in the house rather than on tutors, to improve his child's performance in school.  It sounds ludicrous, but it's not entirely unfathomable. 

Headlines Are Mainly Noise

You've probably already guessed where I'm going with this... As with bathrooms and SAT scores, business journalists probably confuse correlation with causality on occasion.

The stock market is really just a reflection of the buying and selling transactions that occurs.  On a day where more people want to sell than buy, the stock market drops, and vice versa.  That is the main causal link between real world events (i.e. people buying/selling) and stock market movement.  One can only guess at what causes people to buy or sell.  Sometimes, the cause of selling may be entirely cyclical.  Fund managers may participate in an activity called, "window dressing", where they will buy up stocks that have recently performed well as it gets closer to the date they disclose their holdings.  This makes it look like they had made great picks.  If enough fund managers do this on a particular day, it could be a market moving event.  But how often do you see this reported by journalists?

The point is that there are so many factors affecting the stock market transactions such that to make the assertion that the market or even a stock moved in a particular direction as a result of a particular event could be wrong.  Therefore, headlines, at many times, are a source of noise.  In short, take it with a grain of salt.

Useful Causal Links
If we can't trust journalists, what can we trust?  The answer may be a little provocative: ourselves!  When it comes to investing, we really should do our own research.  Aside from the ethics side of things, we need to estimate the value of a company.  The causal link between a stock's price and its earnings power is strong in the long term.  A stock may get beaten down due to whatever reason, but if it continues to grow its positive cash flow, its price will eventually reflect that.  High earning power causes higher stock price.  It is that simple!

Therefore, it is key to be able put a value on a company based on the outlook of its earning power.  If the price is sufficiently below the value, then it is time to buy.  Conversely, when the price rises much higher than the value, we should consider selling.  Again, this goes back to doing the right fundamental analysis on a stock.  If you're new to this blog, start by going to Fundamental Analysis or Rule #1 Investing.

Risk vs. Volatility

In the financial industry, the word "risk" gets thrown around quite frequently but its definition is fairly loose.  Today, we will take a look at how it relates to the term "volatility".  We will find that a stock investor should actually like risk as it is traditionally defined (i.e. volatility).

Risk as Volatility
Investopedia.com is usually a pretty good place to obtain conventional wisdom on investing.  So, let's see how it defines risk.   It basically says 2 things.

Risk is:
1) the chance that an investment's actual return will be different than expected, or
2) standard deviation of the historical returns or average returns of a specific investment.

The two actually say the same thing.   The former is a more down to earth language and the latter is just more mathematical.  At first sight, they sound pretty fair.  For an investment to be risk free, we should know what its expected return should be and the chance that it deviates from it should be very, very low.  Sure, that is exactly what volatility means, but does volatility really equate to risk?  I would argue not quite.

Volatility is Not Risk, But Opportunity
First and foremost, this is not exactly the same definition as we understand the word "risk" to mean.  The Webster dictionary tells us that risk is "the chance that an investment (as a stock or commodity) will lose value", when it is dealing with investments, and I would 100% agree with this definition.  But going back to the financial industry's definition of risk as volatility, we see that it falls short.  The definition speaks nothing about the performance of an investment.  If an investment's expected return is -5% per year and it hits that target bang on every year, by this definition, it is a "risk free" investment.  Moreover, it negates the fact that an investor is able to take advantage of volatility to increase his/her returns.  Lastly, an investment is determined solely by its volatility and is independent of what price one had paid when one first buys the investment.

So how did we get here?  Many academics and other smart people use this definition.  Almost every major financial institution will use this definition of risk to calculate the risk in their portfolios.  I believe it all stems from the random walk theory.  The random walk theory posits that the movement of the price of stocks are randomly distributed.  Thus, past price movement do not predict future price movements.  If one subscribes to this theory, it would be natural for one to define risk as we see it defined by the financial industry.  Since we can't know future price movement, the greater the fluctuation an investment has, the greater risk it contains because at any given moment, its price can either go up or down.

Figure 1: Investments with Low and High Volatility

If we look at Figure 1, we can see two investments.  Investment 1 is depicted by the blue line.  It fluctuates very little.  Investment 2, depicted by the red line, fluctuates a lot.  However, in the end of our time horizon, they both reach the same level.  Conventional wisdom tells us that Investment is riskier because it has more volatility.  Since the random walk theory tells us that we can never predict movements, we are as likely to buy at B and sell at C (i.e. lose money) as we are to buy at A and sell at D (i.e. make money).  Along the same line of thought, the theory implies that the stock gurus like Warren Buffet are as successful as they are because they got lucky.  Warren Buffet is as lucky as you would be lucky if you were blindfolded and threw a dart and hit the bullseye.  Since there are so many stock investors out there, there's bound to be a few that get really lucky and outperform the market.

As you have already guessed, I don't buy into this theory.  Warren Buffet and the like do so well because they are able to accurately determine a stock's intrinsic value.  With volatility, the price of a stock would sometimes drop below that of its value.  This is the time when Buffet buys.  When volatility brings the stock price above its intrinsic value, Buffet sells.  Buy low, sell high...it's really that simple!  Even though stock movements may be random, it does not mean that you have to buy or sell the stock at random times!

If we are able to reliably buy at points A, C and E, and sell at points B, D, and F, respectively, the risk of Investment 2 may be even lower than that of Investment 1.  It is, therefore, entirely possible that you are able to have a safer investment with higher returns!

So What is Risk?
So, we are back to square one.  What is risk?  I would go ahead and re-state Merriam-Webster's definition, that risk is "the chance that an investment (as a stock or commodity) will lose value".  It's actually a pretty good definition.  To personalize it a little more, I would like to add your investment goal in there somewhere.  Perhaps the definition should go something like this: risk is "the chance that an investment will not meet your investment goal."  With this definition, an investment's risk becomes much more relevant.  Many new questions surface, such as, "What is the current inflation rate?", "What is the intrinsic value of the stock?", "What was my purchase price relative to that intrinsic value?", "What are my investment goals?", etc.

In the end, you want your investment to give you returns higher than inflation so that you're actually making money!  You also need to have an investment goal so that your portfolio matches that goal.  If you intend to make $1 million in 10 years and you're starting with $10,000, good luck with that CD (or GIC)!  A CD may give you a volatility-free investment, but the risk that you will not meet your investment goal is 100%!

Where Does This Leave Us?
If you buy into what I said above, the obvious question becomes: how do we determine when the price of a stock is below its value?  There are many investing techniques out there that are based on the fundamental analysis of a stock (looking at its intrinsic value).  And if you have followed this blog, you would know that I am a big fan of Phil Town's Rule #1 Investing.  It's a great and easy way to figure out if a company is "investable" and if its price is sufficiently below its value for you to make your purchase.  Go ahead and click on the link above and see what Rule #1 Investing is all about!

2011 in Review

The year 2011 was quite eventful and it deserves a brief review.  (And that's not including my personal life events!)  I will focus mainly on the sectors relevant to my portfolio, but I'll also try to address some macro issues as well.

First Solar
Let's get the most difficult one out of the way: First Solar (ticker: FSLR).  This was one of my favorite stocks,  but sadly, it wiped out all of my gains for 2011 and then some.  Let's not mince words here... I was dead wrong!  It was not so much wrong judgment of the company's relative performance to its peers as the wrong judgment on the company's ability to avert catastrophe under unfavorable macro conditions.  My overall assessment of the company still stands; it will weather the consolidation of the solar sector and then go on to become a great company again.  However, I was terribly off in my valuation of the company.

Let's look at the lessons learned here.   First, I ignored the many warnings of a supply glut of solar panels.  I believed that because First Solar led the cost per watt metric by miles, that it would be able to maintain high revenue growth along with high margins.  I was proven wrong here.  The Chinese manufacturers were able to dump panels at very, very low prices, causing the sector to essentially implode.  Although First Solar was able to achieve gross margins in the high 30s, its revenue decreased. Earnings significantly missed the mark.

This leads to the second mistake: I trusted management too much.  It had maintained that earnings for 2011 would be around $9 all the way up until October. Then the board kicked the CEO out and revised earnings to around $6.  And this was two quarters gone already.  How do you miss by 33% and not let shareholders know until it was too late?  The CEO had too little skin in the game (i.e. did not own enough shares), and I ignored that too.

Third, I doubled down without double checking.  Phil Town advises us to stockpile a stock if its share price drops significantly, but we would need to know the business is still intact.  I missed the second part.  Again, circle back to mistake 1. I didn't do enough homework.   I should have proven to myself that First Solar could survive a major sector consolidation unscathed.  By stockpiling, I amplified my losses.  The stock saw an impressive 70% drop off its peak!  Luckily, my other stocks performed well and offset some of it.  Perhaps I need to look at limiting any one stock to a certain proportion of my portfolio to prevent such losses from occurring again.

Will I invest in First Solar again?  That is a definite possibility.  I sold all of my position at $37 when they announced the big restructuring.  The stock dipped to near $30 and has rebounded very nicely to $49.  I guess I should have held on a little longer.  But who knew where the stock would have ended up!  The founder is now back at the company's helm and has a viable business plan.  He knows that solar panels are commodity items and is steering the company into value-added services which allows it to charge a premium for its services and panels.  Its focus on large scale projects in emerging markets is also encouraging.  The company, however, will be going through some tough times as it's 2012 forecast numbers aren't great.  I'm staying clear until there is a compelling case for a rebound in revenue and earnings growth.

Google
The stock (ticker: GOOG) in 2011 went for a rollercoaster ride and basically ended up the same place as it had started.  That's not to say the company and its business has done the same.

First, Larry Page, the co-founder is now CEO of the company.  Android is now the most popular smartphone platform on the planet. Google is in the process of buying out Motorola.  Google+ was released and is slowly building steam.  Chrome is now the second most popular browser after Internet Explorer, surpassing Firefox.  Its bread and butter, search, is still gaining market share.  Most importantly, its revenues and earnings continue to grow steadily.

Q4 was a little bit of a hiccup.  Revenue growth was really good, but their cost of revenues and operating expenses grew a little more quickly.  Thus, their earnings were impacted and grew "only" 10% YOY.  Given the number of new initiatives Google has on its plate, I think this is acceptable.  We'll need to keep a close eye on this.

I still like Google's story...it's not going anywhere any time soon!

True Religion 
True Religion (ticker: TRLG) is another of my darling stocks.  It just released its Q4 numbers and the street was not impressed with afterhours trading.  It was down as much as 25% afterhours.  Do note that the stock has appreciated from low 30s to mid to high 30s as it came closer to earnings.

The story remains the same for the company.  Consumer direct segment (i.e. their own stores + online sales) grew significantly, while the US Wholesale segment continued to shrink.  As a result, gross margins continued to rise to 64.1%.  However, the operating margin decreased from 23.6% last year to 20.7% this quarter.  The increase in SG&A costs in domestic and international expansion.  Same store sales were up 11%.

I'm going to take this as a buying opportunity.  My rationale is this: 1) Consumer Direct is killing it and the North American market is far from being saturated, 2) gross margins are super high and rising - this indicates consumers wants their products and are willing to pay the price, and 3) same store sales are increasing - translating into better brand recognition (e.g. they are not just increasing revenues by opening more stores).  We went through a little of this in mid 2011.  The business is intact and I'm going to put my money where my mouth is.  Tomorrow, I'm going to stockpile some more of this baby!

Synaptics
Synaptics (ticker: SYNA) makes touchscreens for phones/tablets and touchpads for laptops.  The stock has been on fire recently.  I got in in the mid $20s and now it's ~$38!  They have shifted their product mix for touchscreens and that has increased margins and profitability.  With the secular growth in the mobile space, I believe Synaptics will continue to do well.  With P/E ratio of 23 right now, I may just take some money off the table and wait for a dip before getting in again.

US Economy
I believe the US economy is in for a great year.  2011 was a little bit of a drag, but I think that was largely due to the Japanese Tsunami.  It disrupted global economic activity and we saw the US jobs market take a little bit of a breather from its growth in mid 2011.  Below is a graph of the US unemployment rate of the last 60 years (courtesy of Google Public Data).  See how every peak of unemployment is followed by a sharp drop back to more reasonable values?  I believe we will see the same sharp drop starting this year.  Already, we're down to 8.3% unemployment (and don't believe the pundits when they say the unemployment is down all because people are no longer looking for work...look at the stats yourself...I have).

Europe will continue to struggle with its debt crisis.  I don't know what's going to happen in Asia, but I think the US will be the shining star in 2012.  Hey, I'm no economist, but there are certainly good things happening in the States.

Conclusion
While I did quite horribly in 2011, I'm hopeful for a better 2012.  How did you do in 2011?  Leave me a comment!

Rule #1 Analysis Spreadsheet: Minor Update to Accommodate Changes to MSN Money

Update October 7, 2014: Spreadsheet has been updated.  See http://goo.gl/KEm3ar

Update July 30, 2014: - New version 1.4.1 has been released.  See post: http://goo.gl/2gedCi

Update June 21, 2012: - I have added a locked version of the spreadsheet (see above).  This one should not have any data corruption issues.  You would need to click on File > Make a Copy in order to be able to edit it, however.

Update June 20, 2012: - I've uploaded a fresh version of the Google Spreadsheet.  Hopefully, this will eliminate the issues that we've been experiencing with Sales and ROIC numbers going missing!

Hello Folks!  MSN Money recently changed the way it displays some of the data that my Rule #1 Spreadsheet uses.  As a result, everything has stopped working.  Not to worry, I have rectified all of the problems that I was aware of and now, I present to your version 1.3: http://goo.gl/5kscR and a locked version http://goo.gl/TY5iA (which should not have any data corruption problems the other has had)!  Have fun with it!

You'll also find that I've added some more columns to the "Stock List" tab which hopefully will give you some more firepower in evaluating your stocks.  A "Noteworthy" tab has also been added to list out some of the stock symbols that have fairly good Rule #1 numbers.  Beware that some may just show up as good in this screen, but may actually be not-so-good stocks.

Please let me know if there are any bugs, etc!  Cheers!

Merry Christmas!

2011 has been a crazy year for my family and me!  First, we sold out first house and moved into our second.  Then, we had our second child, Athan.  And as if we didn't feel like that was enough change, I changed jobs from ATS Automation to Ainsworth!  But I think these were all in God's grand plan for us.  We are thankful that we all made it alive and well!

There were also some bittersweet moments this year...and we are thankful for those as well.  I've always believed in the saying, "Bad things happen to good people to make them better."  Recently, I started to (re)-read the book of Job, after seeing an extended family member go through some very hard times over and over again.  I believe every Catholic/Christian should give Job a good read as it gives a biblical perspective into why God allows suffering in our lives.

Regardless, this is the season to remember that the battle has been won.  "Joy to the world, the Lord is come!"  I wish you and your family a joyful and peaceful Christmas.  Thanks for your continued support in this blog.  I'm truly grateful!  Again, Merry Christmas!

Rule #1 Analysis Spreadsheet: Updated with Auto Stock Lookup

Update October 7, 2014: Spreadsheet has been updated.  See http://goo.gl/KEm3ar

Update January 26, 2012: I've updated the sheet.  Go to the Investing Resources to download the latest sheet.

FINALLY!  It's been a couple of months since I wrote.  A newborn and a 2-year old definitely takes up a majority of my free time!  Today was a bit of a vacation.  The family is staying over at my parents' for the weekend and so, I have some time to sit down and do some personal stuff, while there are plenty of people looking after the kids!

I promised, earlier on, to publish my Rule #1 spreadsheet with the auto stock lookup.  You can access the spreadsheet HERE.  The first thing you need to do is make a copy of the sheet so you can make edits to the sheet.  Click on File > Make a Copy, and name the file to your liking.  Oh yeah, you'll need a Google account.

How the Sheet Works
The main difference in the sheet lies in the "Stock List" tab.  The tab is designed to run the Rule #1 analysis on the symbols that is specified in column A.  Here's a simple procedure on how to use the sheet.

1. Fill in Columns A and B with the symbols and their respective stock exchange.
2. Click on Automation > Run Stocks - Start at Top.  This will start the script and the table will be filled with the Big 5 numbers.

If you have a long list of stocks, the Google script may time out and stop in the middle of the list.  If that's the case, use Automation > Run Stocks - Continue from List instead.  It will continue where you had left off.

In addition to just displaying the Big 5 numbers, I've also added an arbitrary formula that will rate the stock based on the numbers in Column R.  It basically gives a higher score if the Big 5 numbers are greater than 10%, a mediocre score if they are between 0 to 10% and a negative score if the numbers are less than 0%.  Feel free to change this formula to whatever you want it to be.

Data...a Lot of Data!

When I had started working on this sheet in the summer, one of my readers, Brad, got me a very comprehensive list of US stock symbols.  Due to Google's script time out issue, it took me quite a while to go through all 6000+ symbols...but here it is, available to you.  It's under the "Copy of Stock List" tab.  Keep in mind that the data is from the summer, which may be a little outdated.

Brad also gave me a lot of suggestions to add more fields such as P/E ratios, sticker price, current stock price, etc.  I haven't had time to implement much of what he suggested.  For now, I would use this sheet as a stock screener.  Essentially, it'll give you a list of stocks with a Rule #1 score, and you can filter the stocks based on the score.  Take the ones you like and do more research on them.

Let Me Know...

Please send me any feedback that you may have.  I'd like to develop the sheet further to help you out!  Hopefully, it won't take me another 6 months to release the next version!

The Death of (First) Solar?

It's been a dark month for solar...One of my favourite stock just lost a good chunk of its value.  Is this a sign of things to come?  Will solar energy slowly fizzle out?

Let's do a quick re-cap of the happenings in the industry.  With a couple weeks of each other, two US solar panel manufacturers, Evergreen Solar and Solyndra, filed for chapter 11 bankruptcy protection.  The political fallout that ensued included the US Congress putting extreme pressure on the Department of Energy for its $500+ loans to Solyndra.  This puts the loan guarantees that First Solar was looking for in jeopardy.  Word on the street is that it will not get one of the three loans that it was seeking from the DOE.

So, what does the future hold for First Solar?  Or solar in general?  Surprisingly, it is good!  Here are a few reasons.

Traditionally, Europe has been the biggest solar market, with Germany and Italy being top dogs.  With the Eurozone debt problems, they will soon be replaced by the following markets: US, China, and India.  Just look at the comparison.  You have Germany, Italy, Spain, etc....then compare them to US, China, and India.  Even just one of the three nations mentioned can overshadow the entire European market.

Back to First Solar.  So, what happens if it doesn't get the loans from the DOE?  Well, how do other companies get financing?  They sell bonds.  That is exactly what First Solar will do.  True, the cost of borrowing will rise, but the impact is likely just slightly reduced earnings.  At its current price of $73.52, by the end of Q4, the P/E ratio would be 8.0 with the current analysts' estimate of $9.13/share earnings estimate.  Even if FSLR misses by a full dollar, the P/E would a mere 9.0.  The current stock price is absolutely unjustifiable.  By the way, I bought some more shares at $82.50, and will continue to do so.

Going back to Evergreen and Solyndra.  Do take note that the cost per watt of these two companies are greater than $2/watt and $3/watt, respectively.  First Solar is closer to $0.70/watt.  Now, you see why the former two companies went bankrupt.  I have already written about the impending consolidation in the solar industry, with a prediction of Evergreen going belly up coming true *patting myself on the back*!  Look at the days of the automobile.  In the early days of the 20th century, there were hundreds of auto makers in the US.  By the end of the Great Depression, only three survived.  The ensuing years became a time of boom for the Big Three.  I believe that solar energy will be similar.  There are many players now, but we are beginning to see a phase of consolidation.  A few will remain after the dust settles.  My bet is with First Solar.

Do I believe the market is being irrational?  I believe so.  I think the downside risk of buying First Solar now is very minimal.  It was much riskier to have bought the stock at $120, but I still did, because I believed its business was intact.  So, at $73, are you kidding me?  If I were any less responsible, I'd be taking a large chunk of money out of my home equity line of credit!

But, of course, I have to be extra responsible now because our second child, Athanasius, was born just last month, on August 17!  I hope this was a good enough excuse to have put a pause on my blogging!  There's a lot I need to write about, including rolling out an update to my Rule #1 spreadsheet.  I'll do my best to squeeze in some writing time!

Update September 22, 2011 - You would have thought that this guy plagiarized my post!  Great minds think alike! :)

Double Dip? The Question Surfaces Again!

Hello All!  As you may have noticed, the frequency of my posts have dropped drastically over the past few weeks.  That was due to my move to our new house!  Almost all of my free time has been consumed with unboxing, unpacking, cleaning, assembling, etc.  The recent action in the market has prompted me to pick up the pen, so to speak.  As well, I am currently on a business trip and have some free time in the evening to write.

Market Turmoil
To recap, the US Congress took its sweet time and waited until last minute to pass a bill to raise the debt ceiling last week.  The bill was a compromise, something no one really liked.  Not only did the market not rally at the news, it actually shed a couple of hundred points within a few days.  To add fuel to the fire, S&P downgraded the US debt rating to AA+ from a perfect AAA last Friday, after market close.  As expected, a huge selloff happened today, Monday.

Now, it is fair that the question regarding the possibility of a double dip resurfaces.  I wrote about the same double dip issue last year.  I focused more on the market double dip rather than an economic double dip.  I did not believe the market would dip back down to ~700 pts (S&P 500), simply on the assertion that it took the bankruptcy of Lehman Brothers and the near insolvency of many big banks to take the market to those levels.  Today, companies are stronger than ever.  Even the worst offenders in 2008 are making money, companies like Citigroup and General Motors.  We are actually not in too bad of a situation.  This is a market correction...I repeat...this is a market correction.  My guess is that the S&P500 index will bottom out at around 1050 pts +/- 50 pts.

The pessimists will have you doubting these numbers.  The companies are making money, but they're not spending it, they say.  The companies aren't hiring and there is no job recovery.  Last I checked, initial jobless claims were down in the low 400s and the US added 117K jobs in July.  They may not be huge numbers, but they are positive numbers nonetheless.  Unemployment will not go away overnight.  As corporate balance sheets strengthen, companies will start to spend and hire.  Imagine that you are the CEO of a company.  You are making good profits and so are your competitors, and things have been well for over a year now.  What do you do?  Do you keep hoarding cash?  Of course not!  You're probably thinking that you need to invest in the company lest your competitors start taking market share.  So, you begin hiring and spending money.  When companies do well, the economy does well.  Why?  The companies are the economy (or at least a big part of it).

Is there a chance that I'm wrong?  Absolutely!  However, I'm willing to place a bet on my hunch.  You don't sell after the market has already sold off!  The market has already fallen from 1370 to 1120 pts.  If my prediction holds true, we are closer to the bottom than the top.  It's time to start buying.

What About All This Debt and Deficit?
I wished I could tell you the answer to this question.  I'm not an economist and will most definitely not pretend to be one.  (I did buy a macroeconomics textbook recently...hoping to get to it soon.)  Look, the US did not default on its debt.  It simply got downgraded by S&P, which coincidentally is also a rating agency that gave toxic mortgage backed securities AAA credit rating a few years back.  Even if the US did default on its debt, it would not be the end of the world.  Many countries have defaulted on debt before, and they're still around.  Obviously, a default by the biggest economy in the world would send ripples throughout the world, but it didn't happen after all.  It wasn't even close to happening.

I don't know how the US government will solve the debt issue, but I am sure it will.  But even if it doesn't, will the world end?  It surely will not.  Will all of the awesome companies all of a sudden forget how to make money?  I doubt it.

What to Do
There isn't much to investing.  Pick good companies and buy them at excellent prices.  This works whether the economy is doing well or poorly.  It works especially well when everyone is selling.  And this is the time.  Looking at my portfolio, I see First Solar (Ticker: FSLR) at $99.  I bought some at $102 on Friday.  If it falls to $95, I will buy some more.  This price is absolutely not justifiable; it is worth at least $140, if not more.  The same argument goes for the other companies that I own.  So, run your analysis again on your own stocks, and see what the entry or MOS price is.  Remember that famous mantra, "be greedy when others are fearful..."

Advanced Technical Analysis: Finding the Gold In Your Losing Trades

Below a guest post provided by Forex Traders.  I typically focus on equities (stocks), but trading strategies in Forex applies equally well.  If you would like to write a guest post, please contact me.  Click on the About Me link for my contact info.

In life, most of the real lessons we learn are borne in the fires of adversity.  In trading, things are the same.  As humans, we tend to avoid pain at all costs.  Therefore, when we experience pain, our immediate reaction is to do whatever is necessary to stop feeling that pain.  When we have a losing trade, it hurts.  It doesn’t hurt physically, of course, but it hurts emotionally and mentally.  Thus, most traders react to a losing trade by trying to put it out of mind as quick as possible,  and they move on to look for the next trading opportunity. This is a huge mistake.

In life, there are typically deep lessons hidden inside of our failures.  If a person doesn’t look at their failures and extract all that can be learned, then trials are wasted.  In trading, the same principle exists.  We must learn to not run away from losing trades and losing streaks.  They are a natural part of the trading process.  Instead, it is absolutely imperative to objectively review every losing trade in order to find the gold hidden in your losing trades.  In this article, we are going to discuss how to find the gold in your losing trades.

The Plan

Keeping a trade log is essential in relation to developing a high level skill set.  Now, very few traders actually keep a trade log because it can be very tedious, and it is definitely not exciting!  Trading is exciting.  Buying and selling a financial instrument is exciting.  Planning out your trades and recording them in a detailed trade journal is not exciting.  However, if you want to really find the gold that is hidden in your losing trades, it is only possible if you are journaling your trading activity.

The Action

Keeping your trade journal is basically like gather evidence.  If you simply gather evidence, but never analyze it to come to a conclusion, then it’s worthless.  As we stated earlier, very few traders actually keep a detailed, consistent trading journal, and of those who do keep them, even fewer actually analyze their entries in order to find patterns of behavior!

The way to find the gold that is hidden in your losing trades is to sit down at the end of each trading week and intensely analyze every single trading decision and outcome from the week, especially your losing trades.

Why Winners Don’t Teach Us Much

If you follow your stock or currency trading plan perfectly and you close out a position at your profit target, what have you really learned?  Not much, really.  You put your plan together, you followed it, and you were rewarded.  The only thing you will learn in this process is that your plan works.  It will act as further confirmation and help continue to build your confidence, which is very important.

When you have a losing trade, however, something else is happening.  If you follow your plan, and a trade does not work out, why does it not work out?  Something happened that you were not expecting.  And this is where, with a little persistence, you can find gold.  Throughout your trading journey, you will most likely go through stretches where your trading approach will have to be modified.  By analyzing your losing trades, you will find common patterns of behavior around losing trades, and this can be invaluable information.

An Example

I love to use Average Daily Range in my currency trading.  Assuming the 20 Day ADR on EUR/USD is 120 pips, I love to fade EUR/USD back into the trading range once it reaches that 120 pip area and hits major support/resistance.  During the late spring of 2010, when Greece was facing certain default and EUR/USD was falling sharply every day due to forex news, I suffered a major losing streak.  As a result of logging my losing trades and analyzing them, I noticed that if EUR/USD reached its 20 Day ADR too early in the trading day, then the chances were better that it was going to continue in that same direction and not revert back into the day’s range.  This literally transformed my approach and utilization of ADR.

Now, I have a strict rule that if a currency pair reaches its ADR before 8:00 am EST, then I will never fade that momentum.  Instead, I will look for an entry in the direction of the day’s movement, in expectation that we are going to see a large range expansion day.

There is gold hidden in your losing trades.  By closely analyzing them, you will discover how to tweak and refine your trading approach.

Risk Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.

Work in Progress: Rule #1 Big 5s for ALL Stocks!

Just wanted to update you on what I'm working on right now.  I think this will be good news for those seeking new stocks in which to invest.  One of my readers, Brad, had suggested that I somehow automate my Rule #1 spreadsheet to go through every single stock traded in US exchanges and pump out a summary for them.  I took up the challenge and decided to further automate my sheet to do this.

What I did was added another tab into the spreadsheet.  There, I have in one column the symbols of all of the stocks listed in US exchanges (courtesy of Brad) and then I wrote a script to go through each and every one of them and look at their Big 5 numbers.  Since I have 1-year, 5-year and 9-year numbers, I decided to cook up an arbitrary formula to give each company a score.  As you know, Phil Town recommends that the Big 5 numbers be > 10%.  So, if a particular Big 5 number is > 10%, the company gets a score of 3 for it.  If it's > 0% but < 10%, it gets a score of 1, and if it was < 0%, it would get a -1.  I then sum up all of the Big 5 numbers and normalize it to be out of 100.  Since I do get "invalid data" once in a while for whatever reason, I just ignore that data point.  What makes a good company?  I think a score of 60 or above is a pretty solid company.

Figure 1: Updated Rule #1 Spreadsheet

One disappointment I had was that Google limits the run time of a script to be 5 minutes.  The spreadsheet takes about 5 hours to run through the script.  So, I'm painfully refreshing the script to go through the 6000+ symbols.  Once that is done and I've thoroughly debugged the sheet, I will publish the sheet along with its results for you.

I would imagine you would want to sort the score using descending order and just see which companies interest you.  I'm quite excited to see what kind of results I get.  This is really a lot better than using an off-the-shelf stock screener since there is really no Rule #1 screener.  Here, you just hit up the stocks with a high score and start your research there.  Since you will have access to the sheet formulas, you can also create your own formula as you see fit.

Hopefully, I will have it published by the end of the week!

FaithShares Catholic Values: The Only Catholic ETF Out There

So you've read my series on the US Conference of Catholic Bishops' investment guidelines and figured you are just a little too lazy to go through all of that research.  Or you've done all the research and made your picks (good for you!), but you wanted to hedge your bets and buy something that performs a little more like the market.  Well, do I have something for you!  It is the only Catholic ETF out there: the FaithShares Catholic Values ETF (Ticker: FCV).

First of all, if you don't know what an ETF is, the acronym stands for "Exchange Traded Fund".  What that means is it is like a mutual fund where it's run by a fund manager and has many different holdings, but it trades like a stock, where you can buy and sell it within fractions of a second on the open market.  There are also no sales loads, redemption fees, exchange fees, etc.  In other words, it's got all of the advantages of a mutual fund, but not many of the disadvantages.  It does have management fees, however, but really, what funds don't?

I did not feel like boring myself with reading its prospectus (you should if you're thinking about buying it), but I did take a peek at its fact sheet.  From there, I found out what their strategy is.  They take the 400 largest US stocks and apply a screen of them based on the USCCB investment guidelines.  This filters out a number of companies that violate the guidelines.  They then rank the remaining "good" companies based on the same USCCB guidelines.  Once they have a ranking, they take those stocks, and perform sector allocation so that the fund matches the MSCI USA Index, which, for all intents and purposes is equivalent to the S&P500 index.  In short, the FCV mimics the market but invests only in companies which have been screened for Catholic values.

Figure 1: FCV's Performance (Blue) Compared to That of S&P500

Looking at Figure 1, it appears FCV mimics the S&P500 index pretty well.  If you're looking for market returns but want to adhere to Catholic values, this ETF is for you!

I also looked at its top holdings and was quite happy to see 2 of my 4 holdings, Google (Ticker: GOOG) and First Solar (Ticker: FSLR).  My other two, Synaptics (Ticker: SYNA) and True Religion (Ticker: TRLG) were too small to even make it on the radar for the fund to consider.  I had written earlier that I was concerned by Google's leanings to the political left.  I had eventually worked that out and concluded that it was likely ethically acceptable to invest in Google.  I'm glad I've gotten confirmation here.  I will sleep well tonight!

Another thing to mention is that FaithShares donate 10% of the fund's net income to a Catholic charity/organization.  This is excellent!

Overall, I think this ETF is not a bad investment vehicle for those who are lazy, but ethically conscious, or for those who want to hedge their bets.  Do be aware that someone is making an investment decision on behalf of you, and he/she may be wrong!  Factor that into your investment decision.  Lastly, if you're not Catholic, FaithShares does have other Christian oriented ETFs as well.  Do check them out!