:: creative : investor : 101 ::

Minimum Payment - Time to Abolish This Great Idea?

2008-12-24T01:55:00.000-05:00

An interesting study done in Warwick University reveals that minimum payment requirements presented to customers by the credit card companies (as dictated by law) in an effort to increase payment amounts and decrease consumer debt levels, may actually be doing the opposite. According to the study, people who would have otherwise paid a higher amount on their credit card bill, faced with the minimum payment amount, which is usually a very low amount, pay significantly less towards their balance therefore increasing their indebtedness.

Talk about unintended consequences. They should really conduct some economic focus groups and do rigorous simulations before they pass any law intended "to provide incentives for an improved behavior." Of course, a good chunk of all legislations would fall under that category.

Additional Resources:

A nudge in the wrong direction

Wall Street's Dead? Not Quite and Not Likely

2008-12-23T01:00:00.000-05:00

It seems that a belief in the death of Wall Street has become a new paradigm. Anyone stating that Wall Street as we know it is dead and it will take many years, if ever, for it to return to it's glory days instantly becomes a credible expert. In the article I linked to at the bottom, The Economist states:

"The biggest fear on Wall Street is that finance, which accounted for a staggering 40% of corporate profits at the height of the credit bubble, faces decades of relative decline. The survivors will get the spoils, but the booty looks unappealing."

Is it just me, or is this typical depression-minded rhetoric that is common during severe economic downturns? I bet there was similar language in the papers when bond market imploded in the '80s.

In any case, the bubble has burst and financial sector will not constitute 40% of the overall corporate profits in the U.S. any time soon, but I doubt it will take more than five years for their profits to swell again.

Additional Resources:

Wall Street's annus horribilis

Oil Price Volatility: Speculation or Not? Just Don't Ask Politicians

2008-12-22T01:00:00.001-05:00

Currently oil producers blame financial speculators for the oil price volatility while oil consumers state that free markets are really the ones determining the oil price. Call me crazy, but I'm pretty sure I've heard exactly same statements made about six months ago except it was the other way around: Western powers were launching investigations into market speculations while OPEC was saying that it's really the supply and demand that are forcing the price to go high.

How can you stand there and say that speculation has no role in the current market if the price of oil can fluctuate in the 10%+ range within a DAY? Even when there are no inventory reports or supply cuts announcements being made!

On the other hand, Saudi oil minister is saying that we should really get up to a price of $75 per barrel in order for the "marginal producers" to be able to make future investments to maintain future oil supplies. Are you kidding me? When we were at the current price levels of mid-30s per barrel four years ago, I don't remember oil producers making much fuss about the oil price not being high enough for them to make money for future investments. Someone got addicted to oil profits real quick over the past few years and wants to keep the party going. I highly doubt anyone can produce a detailed business plan justifying the need for $75/barrel price in order to sustain future production.

The only issue that I see with the current oil price market is this: volatility. Oil prices simply need to level off and stabilize in order to allow for oil companies and oil producing countries to make reasonable forecasts for capital expenditures. Otherwise, they will be too conservative in their spending and supply will go down too much.

Of course, if you consider the long-term importance of alternative energy sources then $75/barrel may actually be a good thing. Hopefully, President-elect will plow the promised $150 bil into alternative energy regardless of the oil price.

Additional Resources:

Warning on price volatility of oil

Emerging Markets Approach This Downturn Differently

2008-12-21T13:19:00.004-05:00

The Economist recently had an interesting article in regard to how emerging markets have changed the way they deal with economic downturns.

Usually, they exacerbate the condition of their economies by raising interest rates in order to support their currencies. This, in turn, significantly prolongs their slump. This time around, though, many of the emerging economies are taking a different approach. They are letting their currencies float freely while generously (some more so than others) stimulating the economy through interest rate cuts and stimulus packages. This gives us hope that this global recession will not last indefinitely and will end sooner rather than later. It also means that emerging markets may very well rebound earlier than the U.S., despite what some of the "experts" on the tube are saying.

Additional Resources:

Can emerging economies now afford counter-cyclical policies?

GM: What's the Problem and Why Should the Government Help?

2008-11-28T14:26:00.000-05:00

GM is currently under tremendous pressure and its in the survival mode. Should the government help it? Should it be bailed out? How are the automakers different from any other industry that is currently in the cyclical downturn? These questions don't even scratch the surface of the issues at hand. Let's work through this issue in a couple of simple steps.

Why is GM in trouble right now?

Demand for cars slipped more than 20%.
GM's market share has been dramatically reduced because of the shift in demand due to high oil prices.
Product marketing hasn't been effective, even though quality of their products has been on the rise during the past decade.
Lack of design innovation relative to its peers.
Burden of the healthcare and pension benefits for retirees. GM waited too long to restructure the contract with UAW. This is probably one of the more important impediments to the company's financial stability.
UAW doesn't understand the realities of the marketplace and held a hard-line position until the company that employs tens of thousands of its members was on the brink of disaster to soften its terms. Now it may end up with not having all that many members left to pay the dues.
GM's manufacturing and operational management has been inefficient for decades and it hasn't been up to par to compete with the Japanese automakers who are significantly leaner. It's not all management's fault as many of the contracts and sourcing relationships have been established decades ago and it would not be easy to restructure the suppliers' network to maximize efficiency.
Pretty much all of these points apply to Ford and Chrysler as well, they just happened to be slightly better positioned financially, which only delays the inevitable. Whether it was luck or skill on their part, I'm not in a position to judge that.

What will happen if the government won't help GM?

GM can't survive this crisis without outside assistance and the only source of help due to the current state of the capital markets is government.
GM would have to file bankruptcy. If GM files bankruptcy under Chapter 11 and goes into restructuring mode, someone will have to provide debtor-in-possession financing in order for the company to emerge from the Chapter 11 filing. Again, only government would be able to provide that financing. If GM is for some reason forced to file bankruptcy under Chapter 7, it pretty much means liquidation. I don't imagine there would be many buyers for their assets and those who would buy wouldn't pay a fair price for the assets. So, debtors would be left with pennies on the dollar.
GM would probably close most of it's plants in the U.S., layoff most of its 240,000 employees.
GM's first-tier suppliers would lay off many of it's 1 million employees. Ripple effect from the decreased spending from ex-employees would go through the economy like tsunami, slashing jobs in the retail and service sectors. Such layoffs would undoubtedly push the unemployment rate towards the 10% mark nationally and even higher in the states with auto plants such as Michigan, Ohio, Indiana, Illinois, and Missouri
GM's sales would go even lower since consumers would prefer to buy a car from a company that will be there to provide the warranty several years from now and whose cars' resale value would hold up down the road.
Many of the GM's 14,000 dealers would have to close their doors due to lack demand for GM cars and because of GM's restructuring of its dealer network, which is something they should have done quite a while ago.

The bottom line is that GM can't survive as an ongoing entity without significant federal assistance and the taxpayers are on the hook for billions, for everything from lost tax revenues to higher unemployment costs to taking over GM's pension obligations. Basically, the decision that Washington has to make is whether to pay for GM's survival or for its funeral - it's not a question of whether the GM deserves aid or not.

Additional Resources:

QikReview: Fund Picks and Allocation Targets

2008-11-14T01:00:00.001-05:00

After reviewing all the available funds in the previous posts, I was able to pick three funds that provide high quality management and deliver solid returns as compared with their category peers and other funds under review. I also believe that these funds will provide a good allocation: domestic stocks, international stocks, and bonds.

45% Dodge & Cox Stock (DODGX) - I think the domestic market will bounce back sooner than overseas markets will, especially Europe.

30% American Funds EuroPacific Growth (AEPGX.LW) - This fund will provide good exposure to the international markets once they do bounce back while limiting risk in the meantime.

25% Goldman Sachs High Yield (GSHIX) - This fund's goal is to cushion the stock holdings' volatility while not capping the overall returns by providing higher than average yield.

Full List of Current Series of 401(k) Fund Reviews:

Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
Fund Picks and Allocation Targets

QikReview: Goldman Sachs High Yield, Morgan Stanley Small Growth

2008-11-13T01:00:00.003-05:00

Continuing with the series of (401)k funds reviews, below are reviews of the Goldman Sachs High Yield and Morgan Stanley Institutional Small Growth funds.

Goldman Sachs High Yield (GSHIX)

Category: High Yield Bond
Rating: 4
Capital Gains Exposure: -43%
Assets: $3.128 bil
Expense Ratio: 0.73%
Turnover Ratio: 11%
Yield: 11.77%
Redemption Period: 60 days
Redemption Fee: 2%
3-Year Total Cost: $240
Minimum Investment: $10,000,000
Comments: This fund has 86% in Bonds and 12% in Cash. It holds AAA (14), BBB (5), BB (24), B (44), and Below B (13) quality bonds. The bonds are in the following sectors: Corporate (75) and Foreign Corp (13). This fund performs well relative to it's category. It's ranked in the top 10% for it's category. This is a solid fund that is fairly cheap and is more likely to do well than not. Although I'm not too keen investing into bonds right now, this fund is yielding quite a bit to compensate for that risk.
Grade: B-

Morgan Stanley Institutional Small Growth (MSSGX)

Category: Small Growth
Rating: 4
Capital Gains Exposure: -41%
Assets: $1.055 bil
Expense Ratio: 1.01%
Turnover Ratio: 76%
Yield: 0.0%
Redemption Period: 30 days
Redemption Fee: 2%
3-Year Total Cost: $322
Minimum Investment: closed
Comments: This fund invests into Medium (27), Small (64), and Micro (9) companies. It invests into the following sectors: Healthcare (11), Consumer Services (19), Business Services (25), Financials (6), Consumer goods (11), Industrial Materials (9), and Energy (10). The fund has 65 holdings and keeps 35% of assets in the top ten holdings. This fund's performance is mediocre, but not terrible. It is ranked in the top 20% percent peers for the 10-year period and has returned annualized 7% over that same period. This is an OK fund, but I would prefer to invest in a steller small-cap fund if I were to invest in the small-caps at all. Small-caps are bound to underperform the market in the near future.
Grade: C-

Full List of Current Series of 401(k) Fund Reviews:

Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
Fund Picks and Allocation Targets

QikReview: Moderate Allocation Funds - Dodge & Cox, Putnam

2008-11-12T01:00:00.002-05:00

Continuing with the series of (401)k funds reviews, below are reviews of the Moderate Allocation funds.

Dodge & Cox Balanced (DODBX)

Category: Moderate Allocation
Rating: 4
Capital Gains Exposure: -32%
Assets: $15.613 bil
Expense Ratio: 0.53%
Turnover Ratio: 27%
Yield: 3.63%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $170
Minimum Investment: $2,500
Comments: This fund invests into stocks (72) and Bonds (27). It invests into Giant (51), Large (37), and Medium (11) companies. It invests into the following sectors Hardware (12), Media (12), Healthcare (25), Consumer Services (7), Financials (14), Consumer Goods (5), Industrial Materials (10), and Energy (8). The fund holds 82 stocks and 277 bonds; it has 25% of assets in the top ten holdings. I prefer more concentrated portoflios, but this fund does hold many solid stocks - among it's top picks are Novartis, Wells Fargo, WellPoint, GE, and Shlumberger. This fund ranks in the top 5% in it's category for the 10-year period while in the middle of the pack for other time periods. This is a solid fund with a pretty low expense ratio and an experienced management team.
Grade: B

George Putnam Fund of Boston (PGEOX.LW)

Category: Moderate Allocation
Rating: 2
Capital Gains Exposure: N/A
Assets: $1.969 bil
Expense Ratio: 0.98%
Turnover Ratio: 124%
Yield: 5.6%
Redemption Period: 7 days
Redemption Fee: 1%
3-Year Total Cost: $863
Minimum Investment: $500
Comments: It invests into Giant (38), Large (35), and Medium (21) companies. This fund has 51% in stocks, 81% in bonds, and borrows 28% cash. This fund invests into the following sectors: Hardware (8), Telecom (8), Healthcare (11), Consumer Services (5), Financials (23), Consumer Goods (9), Industrial Materials (20), Energy (6), and Utilities (6). This fund has 184 stock holdings and 1,671 bond holdings. It has 37% of assets in the top ten holdings. This fund's performance relative to peers has been rather dismal as it returned 0.77% over the 10-year period. This charges a high fee for worse than the market performance. Not worth it.
Grade: D-

Full List of Current Series of 401(k) Fund Reviews:

Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
Fund Picks and Allocation Targets

American Express: Now a Bank Holding Company

2008-11-11T00:01:00.000-05:00

Today AmEx became a bank holding company. It became a third financial company (after Goldman Sachs and Morgan Stanley) to convert to a bank holding company since the global credit crunch worsened in September. This change will allow the company to borrow directly from the Fed at a much lower rate than before, but this will also subject it to greater federal regulations.

Although this is a positive move for American Express, it also shows how desperate it was to improve its funding sources. Even with the Fed's latest efforts to boost the commercial paper activity, many companies find themselves left high and dry with limited access to funding. AmEx is one of the more financially sound companies and yet it was forced to become a bank holding company, a move significantly changing their long-term growth strategies and possibly limiting opportunities for growth because of the increased oversight. One can only imagine how many more companies are out there trying to become bank holding companies as well and may fail if they don't achieve that status.

What I am wondering about and what I couldn't find an answer for on the Web is this: how do companies get out of being a bank holding entity and is there a history of such actions? If so, here is what these companies can do: shore up their balance sheets, stabilize operations and wait out the credit crunch crisis. Realistically, it will take 5-10 years for the companies like American Express, Goldman Sachs, and Morgan Stanley to be in a position where they don't need to be bank holding companies anymore. So, at that point they could probably sell off their banking units for a tidy profit and grow their core businesses (e.g., businesses that were considered core to their operations before this crisis) at a much faster pace than they could while being bank holding companies. Is this really such a crazy idea?

Additional Resources:

QikReview: Mid-Cap Funds - Alger, Ariel

2008-11-10T01:00:00.001-05:00

Continuing with the series of (401)k funds reviews, below are reviews of the Mid-Cap funds.

Alger MidCap Growth Institutional (ALMRX)

Category: Mid-Cap Growth
Rating: 3
Capital Gains Exposure: -40%
Assets: $0.912 bil
Expense Ratio: 1.17%
Turnover Ratio: 274%
Yield: 0.0%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $372
Minimum Investment: $0
Comments: Does not do very well during recessions, but comes back somewhat strongly. Has 99 holdings and has only 23% of assets in the top ten holdings. Not very expensive. This fund invests into Giant (4), Large (27), Medium (54), Small (12), and Micro (3) companies. It invests into the following sectors Software (10), Hardware (11), Healthcare (11), Consumer Services (8), Financial Services (8), Consumer Goods (8), Industrial Materials (17), and Energy (18). I'm not impressed with this fund because of its mediocre performance.
Grade: C-

Ariel (ARGFX)

Category: Mid-Cap Blend
Rating: 1
Capital Gains Exposure: -5%
Assets: $1.296 bil
Expense Ratio: 1.03%
Turnover Ratio: 25%
Yield: 0.47%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $328
Minimum Investment: $1,000
Comments: This is clearly a long-term oriented fund: it has only 32 holdings with a turnover of 25%. This fund invests into Medium (80) and Small (16) companies. It invests into the following sectors Media (6), Healthcare (7), Consumer Services (6), Business Services (18), Financials (26), Consumer Goods (20), and Industrial Materials (17). Ranking-wise, this fund is currently scratching the bottom of the barrel - it hasn't enjoyed any gains at the end of the '90s (although didn't lose much during the last recession either) and it hasn't experienced any kind of significant gains during this last bull market and now it lost over 40% year-to-date. That is some terrible performance. Of course, this may also mean that this fund will bounce back rather nicely if you start investing in it nice. I've looked at their holdings and they seem more solid than not (from the names that I recognized). In conclusion, this fund's defensive style severely limits its upside in the bull market and yet provides no protection in the bear market - so far this year it has lost more than 90% of the competing funds.
Grade: D+

Full List of Current Series of 401(k) Fund Reviews:

Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
Fund Picks and Allocation Targets

QikReview: Foreign Large-Cap Funds - AllianceBernstein, American

2008-11-09T01:00:00.001-05:00

Continuing with the series of (401)k funds reviews, below are reviews of the Foreign Large-Cap funds.

AllianceBernstein International (AIZAX.LW)

Category: Foreign Large Blend
Rating: 1
Capital Gains Exposure: -
Assets: $2.188 bil
Expense Ratio: 1.42%
Turnover Ratio: 59%
Yield: 1.92%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $855
Minimum Investment: $2,500
Comments: This fund invests into Giant (69), Large (27), and Medium (4) companies. It invests into the following sectors Telecom (7), Healthcare (9), Business Services (5), Financial Services (22), Consumer Goods (12), Industrial Materials (20), Energy (13), and Utilities (6). The split between countries is: Asia ex-Japan (5), UK (27), Japan (15), Germany (12), France (12), and Switzerland (10). The fund has only a 5-year history, which in itself is unimpressive and yet the performance during those 5 years has been even less impressive. It consistently ranks towards the bottom of the pack. It has 130 holdings and only 20% of assets in the top ten holdings. I don't really like it's sector not geographical allocation; the performance has been week and in addition to everything else, the fund is pretty expensive at $855 per $10,000 per 3-years.
Grade: D

American Funds EuroPacific Growth (AEPGX.LW)

Category: Foreign Large Blend
Rating: 5
Capital Gains Exposure: -
Assets: $71.157 bil
Expense Ratio: 0.74%
Turnover Ratio: 38%
Yield: 2.45%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $813
Minimum Investment: $250
Comments: This fund invests into Giant (53), Large (40), and Medium (7) companies. It invests into the following sectors Hardware (6), Telecom (10), Healthcare (10), Consumer Services (6), Financial Services (17), Consumer Goods (13), Industrial Materials (20), Energy (8), and Utilities (6). The split between countries is: Asia ex-Japan (4), UK (7), Japan (7), Germany (10), France (10), Switzerland (8), and Latin America (6). It has a huge number of holdings, 303, and only 18.7% in the top ten holdings. This fund is ranked in the top 10% for the 3-, 5-, and 10-year periods, but then again at this time it only takes a 6% total return to be ranked that high for the 10-year period. Essentially, this is a foreign index fund, albeit an expensive one. I like the allocation of this fund, but I'm not sure if it warrants such high fees.
Grade: B-

Full List of Current Series of 401(k) Fund Reviews:

Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
Fund Picks and Allocation Targets

QikReview: Large-Cap Funds - American, Dodge & Cox, Putnam, State Street

2008-11-08T05:00:00.002-05:00

I was asked to review 401(k) funds for a particular retirement account. In the subsequent series of posts, I've listed reviews of the available funds, my subjective grade for these funds, and my suggested allocation into these funds. In my reviews, "Rating" refers to the Morningstar rating of these funds. These reviews are starting with Large-Caps and then moving on to Foreign Large-Caps, Mid-Caps, Moderate Allocation, and ending with High-Yield Bond and Small-Growth funds.

American Funds Growth (HVRBX)

Category: Large Growth
Rating: Not Rated
Capital Gains Exposure: -
Assets: $0.093 bil
Expense Ratio: 0.88%
Turnover Ratio: N/A
Yield: N/A
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $281
Minimum Investment: $0.0
Comments: This fund has just been created in May, 2008. Naturally, it has already lost about 35%. So, not only does it have an extremely short track record, that records also happens to be horrible. It invests into Giant (42), Large (33), and Medium (22) companies. This fund invests into the following sectors Software (5), Hardware (10), Healthcare (8), Consumer Services (9), Business Services (8), Financials (8), Industrial Materials (20), and Energy (20). 100% of this fund's assets are invested into American Funds Ins Ser Growth, fund which I have not been able to find on Morningstar.
Grade: E

Dodge & Cox Stock (DODGX)

Category: Large Value
Rating: 4
Capital Gains Exposure: -39%
Assets: $36.200 bil
Expense Ratio: 0.52%
Turnover Ratio: 27%
Yield: 2.12%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $167
Minimum Investment: $2,500
Comments: It invests into Giant (51), Large (37), and Medium (11) companies. This fund invests into the following sectors: Hardware (13), Media (12), Healthcare (25), Consumer Services (7), Financials (14), Consumer Goods (5), Industrial Materials (10), and Energy (8). The fund holds 82 stocks and 277 bonds; it has 25% of assets in the top ten holdings. I prefer more concentrated portoflios, but this fund does hold many solid stocks - among it's top picks are Novartis, Wells Fargo, WellPoint, GE, and Shlumberger. This fund ranks in the top 2% in it's category for the 10-year period while in the middle of the pack for other time periods. This fund's portfolio is identical to the Dodge & Cox Balanced stock portfolio except for the lack of bonds. I don't think bonds allocation will be helpful from point on until we are close to next bull market's pick, hence the slighly higher grade.
Grade: B+

Putnam Equity Income (PEYAX.LW)

Category: Large Value
Rating: 4
Capital Gains Exposure: N/A
Assets: $2.330 bil
Expense Ratio: 0.98%
Turnover Ratio: 73%
Yield: 2.17%
Redemption Period: 7 days
Redemption Fee: 1%
3-Year Total Cost: $908
Minimum Investment: $500
Comments: This fund invests into Giant (46), Large (30), and Medium (20) companies. It invests into the following sectors: Hardware (6), Telecom (8), Healthcare (12), Financials (27), Consumer Goods (9), Industrial Materials (10), Energy (18), and Utilities (5). This fund has 99 holdings and keeps 35% of assets in the top ten holdings. This fund performs relatively well with a ranking in the top 25% percentile and delivering 3.26 over the 10-year period. In addition to okay performance it's also very expensive for its caregory.
Grade: D

State Street Equity 500 Index Service (STBIX)

Category: Large Blend
Rating: 3
Capital Gains Exposure: -22%
Assets: $0.167 bil
Expense Ratio: 0.70%
Turnover Ratio: 12%
Yield: 2.57%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $311
Minimum Investment: $25,000,000
Comments: This fund tracks S&P 500 companies. Index fund concept is good, but this fund charges higher than average fee for a simple index fund.
Grade: C

Full List of Current Series of 401(k) Fund Reviews:

Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
Fund Picks and Allocation Targets

Traits of a Successful Speculator - "Reminiscences of a Stock Operator"

2008-11-07T03:00:00.000-05:00

This final excerpt from the "Reminiscences of a Stock Operator" provides a very good description of what trais a successfull speculator/trader must possess. As with most of the gems from this book, this is applicable to long-term investors as well, not just traders.

"Observation, experience, memory and mathematics these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man's unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass.

A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets. After years at the game it becomes a habit to keep posted. He acts almost automatically. He acquires the invaluable professional attitude and that enables him to beat the game at times! This difference between the professional and the amateur or occasional trader cannot be over emphasized. I find, for instance, that memory and mathematics help me very much. Wall Street makes its money on a mathematical basis. I mean, it makes its money by dealing with facts and figures.

A speculator must have faith in himself and in his judgment. The late Dickson G. Watts, ex-President of the New York Cotton Exchange and famous author of "Speculation as a Fine Art," says that courage in a speculator is merely confidence to act on the decision of his mind. With me, I cannot fear to be wrong because I never think I am wrong until I am proven wrong. In fact, I am uncomfortable unless I am capitalizing my experience. The course of the market at a given time does not necessarily prove me wrong. It is the character of the advance or of the decline that determines for me the correctness or the fallacy of my market position. I can only rise by knowledge. If I fall it must be by my own blunders."

Virtual Funds: Technology Fund's Ranking/Performance in Q3 '08 and Overall

2008-11-05T01:00:00.001-05:00

Technology stocks have held up relatively well, especially the blue chip companies. I think this sector's performance will be scattered all over the board, some companies will do well while others will suffer for a prolonged period of time. So, it's a good sector to sift through, but you have to carefully assess how the overall economic conditions may influence your picks' earning power.

Orange line in the chart below shows how my Technology Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

As you can see, this fund is currently stuck in the middle-of-the-pack performance group, which is not a terrible place to be, but not where I'd like to be either. I expect a stronger relative performance from this fund in the coming quarters as I will make an effort to manage it more actively.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I have not changed the picks much - turnover is only 15% since the fund's inception. I plan to shuffle around a good number of these holdings in the upcoming two quarters though. Below are brief profiles of these stocks. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

Accenture (ACN) - With 170,000 employees in 150 offices and 49 countries worldwide, Accenture is a leading provider of IT consulting and outsourcing services to Fortune 100 companies and governments around the globe. About 40% of revenues come from North America. Consulting contributes 60% of total revenue. The firm's business is broadly divided into five operating groups: communications and high-tech, financial services, products, resources, and government. (Source: Morningstar)

Applied Materials (AMAT) - World's largest supplier of semiconductor manufacturing equipment. The firm's systems are used in the chemical vapor deposition, physical vapor deposition, and electroplating steps of the chip-fabrication process. Applied also supplies etching, chemical mechanical polishing, and wafer- and reticle-inspection systems, as well as critical-dimension measurement and defect-inspection scanning electron microscopes. (Source: Morningstar)

Quality Systems (QSII) - Markets information-processing systems to medical and dental group practices, as well as to physician hospital organizations and health maintenance organizations. Its systems are used to manage medical records, treatment planning, appointment scheduling, third-party reimbursement, insurance claims, and other functions. The company also provides hardware and software maintenance and support services. (Source: Morningstar)

Cisco (CSCO) - World's leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among dispersed computer networks. The firm has also entered newer markets, such as home networking, security devices, storage technology, and Internet-based telephony. Services account for about 16% of sales. (Source: Morningstar)

QLogic (QLGC) - Supplies a wide range of components and subsystems for computer storage networks. Customers include OEMs, value-added resellers, and systems integrators. The company focuses on engineering and product design and outsources manufacturing. Primary competitors include Emulex, Cisco, and Brocade. QLogic's top 10 customers account for 85% of revenue, with Hewlett-Packard constituting 20%. (Source: Morningstar)

EMC (EMC) - Leading provider of hardware, software, and services for enterprise network storage. Historically focused on proprietary storage hardware, the company has recently increased its focus on its software and services segments, which now account for more than 50% of revenue. EMC also owns approximately 85% of VMware, a leading provider of virtualization software. (Source: Morningstar)

SimpleTech (STEC) - Provides standard and custom computer-memory products. The company manufactures tools that connect memory cards and hard-drive upgrade kits to personal computers. Applications include desktop and notebook computers, servers, routers, switches, digital cameras, digital video recorders, digital audio players, personal digital assistants, and medical instruments. These systems are based on dynamic random access memory (DRAM), static random access memory (SRAM), and Flash memory technologies. Customers include Unisys and Cisco. (Source: Morningstar)

F5 Networks (FFIV) - Provides products that help manage growing network traffic, application complexity, and security concerns. F5's customer base has evolved from an initial focus on Internet service providers, Web hosters, and e-commerce sites to a current emphasis on the corporate IT market. Customers include Deutsche Telekom, Citigroup, eBay, General Electric, and General Motors. (Source: Morningstar)

SK Telecom (SKM) - Largest mobile-phone operator in South Korea, with more than 22.3 million customers (50.5% market share). SK also provides wireless services through joint ventures and subsidiaries in the United States, Vietnam, China, and Mongolia. SK also owns approximately 44% of Hanaro Telecom, the country's second-largest fixed-line operator. SK Group, Korea's third-largest conglomerate, owns approximately a quarter of SK Telecom. (Source: Morningstar)

Diebold (DBD) - Builds, sells, and services ATMs, security products and systems, and computerized voting machines. Two thirds of Diebold's revenue comes from the sale and service of ATMs, split about equally between the two. Most of its remaining sales come from security offerings and election systems. (Source: Morningstar)

WNS (WNS) - One of the leading end-to-end providers of outsourced business process outsourcing services to clients in the United States and the United Kingdom. The company was founded in 1996 as an in-house BPO unit of British Airways and started serving third-party clients in fiscal 2003. The company's largest offerings are in the travel (37% of revenue) and financial (39% of revenue) industries. WNS has about 22,000 employees, with almost its entire workforce located in India. (Source: Morningstar)

Maxim Integrated Products (MXIM) - Makes high-performance analog and mixed-signal integrated circuits. The company offers a wide range of products serving a host of analog-intensive applications, including power management and data conversion. Maxim supplies its diverse array of about 5,000 circuits to a broad base of customers in end markets including communications, computing, industrial, and consumers. Roughly 70% of the firm's sales are based outside the U.S. (Source: Morningstar)

Corning (GLW) - Leading designer and manufacturing of glass and ceramic substrates found in liquid crystal displays, fiber-optic cables, automobiles, and laboratory products. The company has five primary divisions--display technologies, telecommunications, environmental technologies, specialty materials, and life sciences--but most of its revenues stem from its display technologies and telecommunications segments, which generated about 45% and 30% of sales, respectively. (Source: Morningstar)

Siemens (SI) - A diversified global manufacturer operating in three sectors; industry, energy, and healthcare. About 54% of revenue comes from the industrial segment, which features Siemens automation and drive technologies. Within the energy segment, Siemens produces turbines used in a variety of power plant applications. (Source: Morningstar)

Presidential Election: What May Change After Today

2008-11-04T00:06:00.003-05:00

The election day is finally here and so is the end of all the political ads on TV, radio, and the Internet. Finally, it's back to the real life now as opposed to listening to each candidate's pipe dreams.

Today's election's outcome will be of significance for all of us for years to come, regardless of who will be elected. Of course, I don't see any immediate changes: government's budget for 2009 is already set and it will take time for any of the new President's policies to get enacted. Market, on the other hand, doesn't really care what changes will actually happen it just wants this uncertainty (Presidential election) to be done with so that all the market strategists can start adjusting their models, etc.

Again, no matter who gets elected, the market will treat end of the election as a positive sign even if we'll see some overreactions (up or down) within the next few days or even weeks. So, I would buckle up and get ready for the late-year rally.

Additional Resources:

ETFs Are Becoming More Popular Than Mutual Funds

2008-11-03T01:00:00.000-05:00

A recent article on Morningstar has highlighted a very interesting trend - ETFs are attracting net inflows while mutual funds are experiencing substantial net outflows during the past few months and this year overall. It is not surprising that people are pulling money away from the actively managed mutual funds given that even some of the safest ones, money market mutual funds, can't avoid a negative return. Of course, then we also have a huge percentage of the funds (probably most of them) who fared even worse than the S&P 500 since many of them tried to make riskier bets (such as financials) by calling false bottoms or trying to make up for the horrendous performance earlier in the year. Either way, no one should be surprised that mutual funds are seeing significant outflows of capital ($1.5 trillion net outflows in 2008 according to the Morningstar).

What I do find somewhat surprising is the rate at which ETFs are garnering assets. Morningstar estimates that year to date ETFs have attracted $82 billion in net inflows bringing the current total to $549 billion. That's a year to date growth of 15% in total assets in ETFs! Some of the theories that Morningstar has to explain this trend are:

Money aren't flowing into ETFs from the mutual funds alone, but also from the individual stock holdings. With the volatility being what it is nowadays, investors are switching into a more diversified type of asset that they count on to reduce daily volatility.

While people who hold mutual funds maybe cashing out or moving assets elsewhere because of the distrust in the active management, asset allocators who use ETFs for the same purposes in their portfolios are sticking to their strategies since they tend to be more sophisticated and patient investors. Therefore, ETF investors continue to contribute to their ETF holdings, while mutual fund investors are decreasing their assets in the mutual funds.

This is all part of a continuing trend of more investors switching into ETF products from the mutual funds for the purposes of tax efficiency and lower costs.

Another point that I find interesting is that just last year a number of articles popped up saying that this ETF frenzy isn't going to last, that the ETF bubble is brewing, that all these obscure ETFs (such as HealthShares Infectious Disease Index and Elliot Wave ETF) are signs of a late-stage bubble that is about to pop. Well, this bubble didn't pop, if anything, ETF product is now proving to be a wise asset allocation tool and a good diversifier.

Additional Resources:

Virtual Funds: Healthcare Fund's Ranking/Performance in Q3 '08 and Overall

2008-11-01T01:00:00.000-04:00

Among all the sectors, healthcare has held up better than most. Of course, now, with the benefit of hindsight, various pundits and talking heads are pointing out that this is the safe haven with a lot of growth potential. What's the logic here? Since this sector has lost the least, it must grow the most now? Nonsense. If anything, now is probably not the time to invest in the healthcare considering the significance of upside potential in other, very beaten-down sectors. If you're nevertheless curious about what has done relatively well so far, here I will detail the performance of the virtual mutual fund I've set up for the Healthcare sector on the Marketocracy web site.

Orange line in the chart below shows how my Healthcare Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

Thanks to the very strong performance in the 3rd quarter, this fund is now highly ranked in the 6-months and 1-year periods. But then again, in the current market environment it's not about winning the most, but rather about losing the least. I do think that healthcare will do well in the 4th quarter after the presidential elections are over with. Markets hate uncertainty more than bad news and discount healthcare stocks accordingly. Once some of the uncertainty goes away, so will the discount on these stocks.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I have not changed the picks since the fund's inception, so the turnover is non-existent. I expect to add to my positions in several of these stocks since I still have $236K of Cash in this fund. Below are brief profiles of these stocks. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

Barr Pharmaceuticals (BRL) - Develops, manufactures, and sells generic and branded drugs through operating subsidiaries Barr Laboratories and Duramed Pharmaceuticals. Including Pliva, its product portfolio contains hundreds of generics and 25 proprietary pharmaceutical products. Barr acquired FEI Women's Health in November 2005 and Pliva in 2006. (Source: Morningstar)

Amgen (AMG) - A leader in biotechnology-based human therapeutics, with historical expertise in renal disease and cancer supportive care products. Flagship drugs include red blood cell boosters Epogen and Aranesp, immune system boosters Neupogen and Neulasta, and Enbrel for inflammatory diseases. Amgen introduced its first cancer therapeutic, Vectibix, in 2006, and late-stage development efforts range from osteoporosis treatments to cancer antibodies. (Source: Morningstar)

Johnson & Johnson (JNJ) - Ranks as the world's largest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer. While the pharmaceutical division currently represents 40% of total sales, we expect patent losses to reduce this proportion to 30% over the next 10 years, with the remaining divisions picking up equal share. (Source: Morningstar)

Novartis (NVS) - Develops and manufactures health-care products within its four main operating segments, including branded pharmaceuticals, generic pharmaceuticals, diagnostic and vaccines, and consumer products. (Source: Morningstar)

Quest Diagnostics (DGX) - Leading independent provider of diagnostic testing, information, and services in the U.S. The company generates more than 90% of its revenue through clinical testing, anatomic pathology, esoteric testing, and substance abuse testing at its national network of 2,100 patient service centers. The firm also provides clinical trials testing, risk assessment services, and information technology solutions. (Source: Morningstar)

McKesson (MCK) - Leading distributor of pharmaceuticals, specialty drugs, medical and surgical supplies, and health and beauty care products in North America. McKesson's Technology Solutions segment provides software related to pharmacy services, medical records, patient care, and financial management. (Source: Morningstar)

Pfizer (PFE) - World's largest pharmaceutical firm, with annual sales near $50 billion. After the sale of its consumer health-care division to J&J, prescription drugs now account for more than 90% of sales. Top sellers include cholesterol-lowering Lipitor, Celebrex for arthritis, Viagra for impotence, and Lyrica for epilepsy and some types of neuropathic pain. Recently approved drugs with blockbuster potential include oncology drug Sutent and Chantix for smoking cessation. (Source: Morningstar)

GlaxoSmithKline (GSK) - Within the pharmaceutical industry, GlaxoSmithKline ranks second only to Pfizer in market capitalization. The company wields its might across multiple therapeutic classes, including cardiovascular, metabolic, respiratory, neurological, and antiviral, as well as vaccines and consumer products. Prescription drug and vaccine sales account for more than 85% of total sales. (Source: Morningstar)

Medtronic (MDT) - One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and artificial spinal discs. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 38% of the company's total sales. (Source: Morningstar)

Hospira (HSP) - One of the largest global specialty pharmaceutical and medication-delivery companies. It offers generic injectable drugs primarily to U.S. hospitals, integrated medication-delivery systems that provide infusion therapy and pain management, and contract-manufacturing services to biopharmaceutical companies. Hospira was spun off from Abbott Laboratories in April 2004 and purchased Mayne Pharma for $2 billion in February 2007. (Source: Morningstar)

UnitedHealth Group (UNH) - Provides health insurance and related services to about 70 million Americans. Products include risk-based health insurance, non-risk-based plan management for self-insured employers, Medicare Advantage, Medicaid, and SCHIP programs, pharmacy benefit and disease management, and database and consulting services. (Source: Morningstar)

About Stock Tips - "Reminiscences of a Stock Operator"

2008-10-31T03:00:00.002-04:00

This is a great piece that goes into details of why stock tips are bad and why people who use and give such tips usually trap themselves in a loop of bad investment decisions.

"Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tipseeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn't, better luck with the next. I am thinking of the average customer of the average commission house. There is a type of promoter or manipulator that believes in tips first, last and all the time. A good flow of tips is considered by him as a sort of sublimated publicity work, the best merchandising dope in the world, for, since tip-seekers and tiptakers are invariably tip-passers, tip-broadcasting becomes a sort of endless-chain advertising. The tipster-promoter labours under the delusion that no human being breathes who can resist a tip if properly delivered. He studies the art of handing them out artistically.

It has always seemed to me the height of damfoolishness to trade on tips. I suppose I am not built the way a tip-taker is. I sometimes think that tip-takers are like drunkards. There are some who can't resist the craving and always look forward to those jags which they consider indispensable to their happiness. It is so easy to open your ears and let the tip in. To be told precisely what to do to be happy in such a manner that you can easily obey is the next nicest thing to being happy which is a mighty long first step toward the fulfillment of your heart's desire. It is not so much greed made blind by eagerness as it is hope bandaged by the unwillingness to do any thinking.

And it is not only among the outside public that you find inveterate tip-takers. The professional trader on the floor of the New York Stock Exchange is quite as bad. I am definitely aware that no end of them cherish mistaken notions of me because I never give anybody tips. If I told the average man, "Sell yourself five thousand Steel!" he would do it on the spot. But if I tell him I am quite bearish on the entire market and give him my reasons in detail, he finds trouble in listening and after I'm done talking he will glare at me for wasting his time expressing my views on general conditions instead of giving him a direct and specific tip, like a real philanthropist of the type that is so abundant in Wall Street the sort who loves to put millions into the pockets of friends, acquaintances and utter strangers alike.

The belief in miracles that all men cherish is born of immoderate indulgence in hope. There are people who go on hope sprees periodically and we all know the chronic hope drunkard that is held up before us as an exemplary optimist. Tip-takers are all they really are.

Now what's the use of talking about sucker tiptakers? Men do not take tips because they are bally asses but because they like those hope cocktails I spoke of. Old Baron Rothschild's recipe for wealth winning applies with greater force than ever to speculation. Somebody asked him if making money in the Bourse was not a very difficult matter, and he replied that, on the contrary, he thought it was very easy.

"That is because you are so rich," objected the interviewer.

"Not at all. I have found an easy way and I stick to it. I simply cannot help making money. I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.""

Virtual Funds: Financial Fund's Ranking/Performance in Q3 '08 and Overall

2008-10-30T01:00:00.000-04:00

If you thought that the 3rd quarter was tough for Energy, well, extrapolate that quarter onto a full year and you will understand how the Financials have done. They've been beaten down time and time again this year. Every time they'd try to rally back up, they'd get knocked back down. To a large extent this had been a non-discriminatory beatdown, although high-quality institutions, however discounted they may be now, have still faired much better than the likes of Citigroup and my personal favorite, AIG. Here I will detail the performance of the virtual mutual fund I've set up for the Financial sector on the Marketocracy web site.

Orange line in the chart below shows how my Financial Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

As you can see above, overall performance has been pretty dismal. Of course, 1-month performances for the months of June and September are rather curious freaks of nature. I would venture to say that 2nd quarter's 1.4th percentile ranking set me up for the September's 98th percentile and 3rd quarter's 88.3rd percentile rankings. Very interesting. What's my prediction for the 4th quarter? Just like everything else, financials will rise up towards the end of the year, but whether they'll recover from the new lows they'll make in the 4th quarter is anyone's guess.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I've pretty much stuck to the original picks, so turnover is only 20.4% for this fund. I will probably do some house cleaning in the 4th quarter to set up this fund for the 2009 investing year. Below are brief profiles of the stocks currently in the fund. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

Berkshire Hathaway (BRK.B) - This diversified holding company owns and operates more than 70 businesses and also invests widely in undervalued equities and bonds. Berkshire owns large stakes in Coke, Procter & Gamble, and American Express. Berkshire is the world's only AAA rated reinsurer; its insurance businesses include Geico, General Re, and National Indemnity. Berkshire also owns stakes in several private businesses, including Medical Protective, Forest River, and Justin Brands. (Source: Morningstar)

U.S. Bancorp (USB) -Had assets of about $242 billion as of June 2007--ranking it as the seventh-largest U.S. bank by total assets. The firm has four main business lines: consumer banking, wholesale banking, wealth management, and payment services. Approximately 50% of revenue is fee-based, similar to other financial institutions of US Bancorp's size. The bank has more than 2,400 offices concentrated in the Midwestern and Western states. (Source: Morningstar)

Northern Trust (NTRS) - A large custodian bank, providing services to big institutional clients such as endowments and fund managers, as well as to high-net-worth individuals. The company is also a large asset manager, with around $750 billion in assets under management. Fees from custodial and management services generate nearly three fourths of revenue, with the rest provided by net interest from lending operations. (Source: Morningstar)

Goldman Sachs (GS) - A global investment banking firm whose activities are organized into investment banking, trading and principal investments, and asset-management and securities services segments. The firm recently reorganized itself as a bank holding company regulated by the Federal Reserve. (Source: Morningstar)

American Express (AXP) - Best known for its flagship green charge card, is segmented into three main businesses: U.S. card services, international card and global commercial services, and global network and merchant services. Its former financial advisor segment, American Express Financial Advisors, was spun off to shareholders in 2005 and is now known as Ameriprise. (Source: Morningstar)

Wesco Financial (WSC) - This diversified holding company is 80% owned by Berkshire Hathaway, which controls it. Wesco serves as a conduit for select Berkshire investments, including Coca-Cola and P&G. Wesco also owns businesses that provide insurance, rent furniture, and custom-manufacture steel. Wesco offers supercatastrophe reinsurance. Kansas Bankers Surety provides bank insurance. Precision Steel services niche steel markets. CORT leases furniture and offers relocation services. (Source: Morningstar)

Associated Bank-Corp (ASBC) - Based in Green Bay, Wis., Associated Banc-Corp. has $22 billion in assets and more than $13 billion of deposits. The company has 300 branches in Wisconsin, Minnesota, and Illinois. Associated's portfolio is 66% commercial, 20% retail (home equity, installment), and 14% residential mortgage. (Source: Morningstar)

Cathay General Bancorp (CATY) - A California-based regional bank primarily serving the Chinese American community. With more than 45 branches and three international representative offices, the bank provides traditional loan and deposit products, as well as international trade-related services to individuals and small to midsize businesses. The bank has more than $7 billion in assets. (Source: Morningstar)

CME Group (CME) - The largest futures and options exchange in the world. It was formed from the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade in 2007. It serves the speculation, asset allocation, and hedging needs of individuals and institutions with its products based on interest rates, equities, foreign exchange, commodities, and alternative investments. (Source: Morningstar)

Regions Financial (RF) - The bank, which has $144 billion in assets, operates retail and commercial banking businesses and owns investment brokerage house Morgan Keegan, which made up 18% of the firm's 2007 revenue. With about 2,000 offices, Regions operates in 16 states and is among the largest banks in the United States by assets. (Source: Morningstar)

Morgan Stanley (MS) - Morgan Stanley is a global investment bank with history through its legacy firms that can be traced back to 1924. The company has institutional securities, wealth management, and asset management segments and more than 45,000 employees. The company derives approximately half of its total revenues outside of the Americas. (Source: Morningstar)

CB Richard Ellis Group (CBG) - In terms of sales, CB Richard Ellis is the largest commercial real estate services firm, offering capital markets services, property and facility management, tenant representation, transaction services, valuations and appraisals, investment management, and property development services, among others. The firm operates a global network of 29,000 employees in 300 offices worldwide. It claimed 85 of the Fortune 100 as clients in 2007. (Source: Morningstar)

Wachovia (WB) - The fourth-largest bank by assets in the United States. The bank operates in 21 states and has a dominant market position in the fast-growing Southeast and the wealthy Mid-Atlantic states. Recent acquisitions have given Wachovia a presence in California, as well. Wachovia also runs an investment bank and wealth-management business. Wachovia Securities--a joint venture with Prudential--is the second-largest retail brokerage in the U.S. (Currently in the process of being merged into Wells Fargo, it's acquirer.) (Source: Morningstar)

Hazards of Speculation: Unexpected Events - "Reminiscences of a Stock Operator"

2008-10-29T03:00:00.001-04:00

Although in general I disagree with proponents of diversification because such experts' advice usually involves overdiversification, this quote makes a good point of what can happen if you put all your eggs into one basket. As with anything else in life, prudent investing is about moderation and balance. Diversify, but don't overdiversify; have a concentrated portfolio, but don't put your eggs into one basket.

"Among the hazards of speculation the happening of the unexpected I might even say of the unexpectable ranks high. There are certain chances that the most prudent man is justified in taking chances that he must take if he wishes to be more than a mercantile mollusk. Normal business hazards are no worse than the risks a man runs when he goes out of his house into the street or sets out on a railroad journey. When I lose money by reason of some development which nobody could foresee I think no more vindictively of it than I do of an inconveniently timed storm. Life itself from the cradle to the grave is a gamble and what happens to me because I do not possess the gift of second sight I can bear undisturbed."

Virtual Funds: Energy Fund's Ranking/Performance in Q3 '08 and Overall

2008-10-28T01:00:00.000-04:00

This has been a tough year and a very tough 3rd quarter for all sectors. Energy was affected as much if not worse than most of the other sectors. Here I will detail the performance of the virtual mutual fund I've set up for the Energy sector on the Marketocracy web site.

Orange line in the chart below shows how my Energy Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

As you can see this fund has done very will in the 1st and 2nd quarters of 2008, but as the commodities (and energy in particular) crashed by the middle of the summer, fund's performance has turned dismal in the 3rd quarter. I don't expect any kind of a significant upward movement in this sector until December in the earliest, but most likely towards the spring. The colder the winter will be and the better 4th quarter economic indicators will be, the more likely energy sector will start rising back up.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I have not changed the picks since the fund's inception, so the turnover is negligible. I expect to add to my positions in several of these stocks since I still have $186K of Cash in this fund. Below are brief profiles of these stocks. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

NuStar Energy (NS) - Based in San Antonio, Texas, NuStar Energy LP is a master limited partnership that was spun off from refiner Valero Energy. NuStar holds most of Valero Energy's pipelines, terminals, and storage facilities. The 2005 acquisition of the Kaneb companies more than doubled NuStar's asset base to 9,300-plus miles of crude-oil and refined-product pipelines, 86 terminal facilities, and four crude-oil storage facilities. (Source: Morningstar)

Buckeye Partners (BPL) - Owns and operates refined petroleum pipelines and storage terminals in the United States. Most of the company's assets are found in the Northeast and Midwest, though it also operates terminals and some smaller pipelines in the Southeast and West. Buckeye's pipelines transport a variety of refined petroleum products connecting refineries, storage facilities, other companies' pipelines, and airports. (Source: Morningstar)

Boardwalk Pipeline Partners (BWP) - Was formed in August 2005 by its parent, Loews Corporation, to acquire and develop natural-gas pipelines and storage facilities. The partnership owns two interstate natural-gas pipeline systems, which consist of 13,470 miles of pipe spanning from Texas to Ohio, and 11 underground natural-gas storage facilities. Aggressive expansion plans will increase total pipeline and storage capacity dramatically during the next several years. (Source: Morningstar)

Energy Transfer Partners (ETP) - A master limited partnership primarily engaged in natural-gas transportation and storage. The partnership operates more than 12,000 miles of natural-gas gathering and intrastate transportation pipelines in Texas and Louisiana and the 2,500-mile Transwestern interstate pipeline. Also, Energy Transfer Partners is the third-largest retail marketer of propane in the U.S., serving more than a million customers in 41 states. (Source: Morningstar)

Unit Corporation (UNT) - Unit is engaged in the contract drilling of oil and natural-gas wells. The company also develops, acquires, and produces oil and natural-gas properties and markets natural gas. Unit operates primarily in the Texas Gulf coast and Rocky Mountain regions, as well as in the Anadarko and Arkoma Basins, which cover portions of Oklahoma, Texas, Kansas, and Arkansas. The company owns and operates approximately 75 drilling rigs in these regions. Unit is based in Tulsa, Oklahoma. (Source: Morningstar)

Ensco International (ESV) - Owns one of the newest jack-up fleets in the contract drilling industry, which drills for oil and natural gas globally. The firm has been acquiring jack-ups since the early 1990s and has recently expanded its 46-jack-up fleet with its first semisubmersible. It has several additional semisubmersibles under construction. (Source: Morningstar)

Buckeye GP Holdings (BGH) - Manages a network of refined oil products pipelines and terminals through its subsidiary, Buckeye Partners. Most of the company's assets are found in the Northeast and Midwest, though it also operates terminals and some smaller pipelines in the Southeast and West. Buckeye's pipelines transport a variety of refined petroleum products connecting refineries, storage facilities, other companies' pipelines, and airports. (Source: Morningstar)

Energy Transfer Equity (ETE) - Owns the general partner interests, incentive distribution rights, and about 46% of the outstanding limited partner interests of Energy Transfer Partners. ETP is a master limited partnership primarily engaged in natural-gas transportation and storage and also is the third-largest retail marketer of propane in the U.S., serving more than a million customers in 41 states. (Source: Morningstar)

Chesapeake Energy (CHK) - An independent oil and natural-gas producer. CEO Aubrey McClendon cofounded Chesapeake in 1989 and took it public in 1993. The firm's proved reserves of 11 trillion cubic feet of natural-gas equivalent are located primarily in the Mid-Continent and Appalachian basin. Chesapeake also owns natural-gas gathering and processing assets and several drilling rigs. (Source: Morningstar)

Southern Union (SUG) - Southern Union operates an array of regulated and unregulated assets divided into the transportation and storage, gathering and processing, and distribution segments. The transportation and storage assets, comprising one of the nation's largest LNG terminals and a pipeline network stretching from Texas up through the Midwest and across to south Florida, generate the lion's share of cash flows. (Source: Morningstar)

Cal Dive International (DVR) - Cal Dive International, a marine contractor company, provides underwater services to offshore natural gas and oil firms. These services include manned diving, pipe lay and pipe burial services. It also constructs, inspects, maintains, repairs and decommissions offshore pipeline infrastructure in the Gulf of Mexico, Middle East, Southeast Asia, and Australia. Helix Energy Solutions Group is its parent company. (Source: Morningstar)

Market Will Not Pay For Your Car - "Reminiscences of a Stock Operator"

2008-10-27T03:00:00.003-04:00

The point here is that you should not get into the stock market if you're simply looking for easy money. Either make long-term investments into solid companies or make it a full-time job to speculate in the market. One can't go into the market expecting great returns without the appropriate amount of knowledge, research, and time for investments to grow.

"There isn't a man in Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting. I could build a huge hospital with the birthday presents that the tight-fisted stock market has refused to pay for. In fact, of all hoodoos in Wall Street I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent.

Like all well-authenticated hoodoos this has its reason for being. What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait. The market must be nice to him at once if at all. He flatters himself that he is not asking more than to place an even-money bet. Because he is prepared to run quick say, stop his loss at two points when all he hopes to make is two points he hugs the fallacy that he is merely taking a fifty-fifty chance. Why, I've known men to lose thousands of dollars on such trades, particularly on purchases made at the height of a bull market just before a moderate reaction. It certainly is no way to trade."

Speculator's Worst Enemy Is Himself - "Reminiscences of a Stock Operator"

2008-10-24T03:00:00.004-04:00

This piece is actually as important for investors as it is for speculators. Fear, hope, and greed live within all of us, but it is those who control (or ignore) these feelings the best who succeed in the investment world.

"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day and you lose more than you should had you not listened to hope to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.

I have been in the speculative game ever since I was fourteen. It is all I have ever done. I think I know what I am talking about. And the conclusion that I have reached after nearly thirty years of constant trading, both on a shoestring and with millions of dollars back of me, is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It's like the track. A man may beat a horse race, but he cannot beat horse racing."

Trading In Narrow Markets - "Reminiscences of a Stock Operator"

2008-10-23T03:00:00.002-04:00

This short excerpt speaks for itself. Once again, market is always right, so don't even try to argue with it.

"In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction. A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations. Stock-market postmortems don't pay dividends."

About Market Trending - "Reminiscences of a Stock Operator"

2008-10-22T03:00:00.004-04:00

In this part, market trending is touched upon. I think it's important for investors/traders to combine both, fundamental and technical factors in their decision-making process.

"This matter of tape reading is not so complicated as it appears. Of course you need experience. But it is even more important to keep certain fundamentals in mind. To read the tape is not to have your fortune told. The tape does not tell you how much you will surely be worth next Thursday at 1:35 p.m. The object of reading the tape is to ascertain, first, how and, next, when to trade that is, whether it is wiser to buy than to sell. It works exactly the same for stocks as for cotton or wheat or corn or oats.

You watch the market that is, the course of prices as recorded by the tape with one object: to determine the direction that is, the price tendency. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.

Nobody should be puzzled as to whether a market is a bull or a bear market after it fairly starts. The trend is evident to a man who has an open mind and reasonably clear sight, for it is never wise for a speculator to fit his facts to his theories. Such a man will, or ought to, know whether it is a bull or a bear market, and if he knows that he knows whether to buy or to sell. It is therefore at the very inception of the movement that a man needs to know whether to buy or to sell.

Millions upon millions of dollars have been lost by men who bought stocks because they looked cheap or sold them because they looked dear. The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in. Therefore the thing to determine is the speculative line of least resistance at the moment of trading; and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.

And right here I will say that, though I do not give it as a mathematical certainty or as an axiom of speculation, my experience has been that accidents that is, the unexpected or unforeseen have always helped me in my market position whenever the latter has been based upon my determination of the line of least resistance.

You will find in actual practice that if you trade as I have indicated any important piece of news given out between the closing of one market and the opening of another is usually in harmony with the line of least resistance. The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa.

It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself that is, against human nature. That is the reason why I say that the man who is right always has two forces working in his favor basic conditions and the men who are wrong. In a bull market bear factors are ignored. That is human nature, and yet human beings profess astonishment at it. People will tell you that the wheat crop has gone to pot because there has been bad weather in one or two sections and some farmers have been ruined. When the entire crop is gathered and all the farmers in all the wheat-growing sections begin to take their wheat to the elevators the bulls are surprised at the smallness of the damage. They discover that they merely have helped the bears."