Okay, I Broke My Promise

I was going to start writing more in-depth about my portfolio, but I broke my promise. The project I am on is sucking life out of me and the minute I am done with the day, I just want to head back to the hotel room, take a shower, eat, phone in with my wife, then go to sleep. And during the weekend, the last thing I want to do is sit in front of a computer. As a result, I am not posting as much as I did.

In any case, I like to talk about certain details of how I handle my portfolio so it should shed some light of how I manage it. As of last Thursday, my portfolio that I managed myself had a 3K drop from a week before. That's roughly a 3% drop. Most of the drop however, came from just two positions, Doral Financial Corp, and Digital River. DRL lost about $700, while DRIV was down $10/share, made it a 1K drop for me. The fact that DRIV was up $6/share for me before the drop, makes the pain a little more tolerable. So what's a guy with a human stomach to do? Interestingly enough, I reacted totally differently to each position. For DRL, I close my position right-away. The reason why DRL was down was largely due to the fact that

1. It cut its dividend
2. It postponed its SEC filing further, contrary to what they promised earlier this year, which they indicated they would file by Nov
3. They are going to take a $600Million write-off due to new found financial data
4. SEC is launching a new probe into the company

So there you have it. I was dead wrong when I bought the stock in low teens. One good things about big losses is that it leave so big of an impression, that it almost guarantee that you'll never do the same stupid thing again. I remember 2 years ago I shorted (correctly so) SOHU as a hedge for my long positions. Then I watched it soared and started panic. After the loss amounted to $1000, I covered. A stupid thing to do because SOHU eventually came back to earth. Had I ever held on to my short position, I would've made quite a handsome amount. That taught me a valueable lesson. Never ever get into something without strong conviction, and know what you are doing. I either had the conviction, nor did I master the art of shorting yet. In the case of DRL, it was a different story. I had pretty strong conviction. The company had very good track record of Free Cash Flow (better indicator than earning), was paying a hefty dividend because of recent price drop. The company had come out and pretty firm about they will have a restatement in November. It's one of the biggest mortgage companies serving the latin American. I also have to admit that the main reason I bought into DRL was because of its hefty yield. I am pretty convinced that the economy is heading towards a downturn for the next 12-18 months and buying high-yield stocks gives me a defense mechanism. The lesson for me here is that

1. Dividend yield is a lot riskier with a much smaller company
2. I broke my own investment rule of making sure the top executives are top notch in terms of ethics.

The fact that I got into this stock knowing there is accounting irregularity makes me want to puke. How stupid is that!

One the other hand, I am very excited about DRIV being down. Sure, the paper loss is not a fun thing, but wait till you hear why DRIV was down. The company reported earning on the 26th of October. For the third quarter of 2005, Digital River reported $53 million in revenues, up 35% over last year. GAAP earnings were up 41% to $0.31 per share. Such dynamic growth was met with a 28% sell off. Why? Because the company is cautious about 2006. It noted that one of its biggest client, Symantec, is to face competition from Microsoft. This might result in a slow down in Symantec own business, and might affect DRIV 2006 revenue. The fact that SYMC represents 1/3 of the revenue for DRIV, means to me that the rest of the investors are treating as if DRIV won't get any business at all from SYMC from next year and on. Such over reaction, not to mention that DRIV is growing business with other US clients, and foreign markets. The only logical thing for me to do is to load up more, double down.

In fact, if DRIV doesn't go up after I bought more, it's a good opportunity for me to sell off the shares that I bought at a higher price, and use the loss to offset some of the dividends (of which some are treated as short term gain, because they are ordinary dividend). Of course, I have to do this after 31 days my purchase. Otherwise it would be treated as a white wash.

Spotting Value

For those follow my blog, I owe it to them that I haven't explained much about my investing philosophy. I believe in order to be successful in investing, one must have conviction, that his/her way to doing thing is a good approach, and that approach can not be swayed by popular opinion of the time. This philosophy could be anything, even for day traders. Day-trade is not for anyone, but if you have got the tools and you got the nerve, go for it. There are a number of successful rapid traders out there, it just that the ratio between the ones that make money and the ones that didn't make money is so huge that percentage is approaching the limit of zero (pre-cal, anyone?)

In any case, if you haven't noticed already, I am a value investor. Actually, it's a mis-label. Value and growth are interchangeable parts of my investment philosophy. My approach is to seek companies that has the potential to generate high amount of Free Cash Flow, with a strong foothold in the business area that I personally understand, and is trade a large discount to its future earning. In other words, I buy stocks that are in huge discount to its intrinsic value. Value investors should recognize immediately that, this is the concept of "Margin Of Safety" from Guru Ben Graham.

In the coming days, I will post some interesting topics, such as inflating, interest rates, short ratios, to company specifics. I will discuss how these pieces fit together for me. I will also start posting my personal account performance, versus my account managed by my money manager, and the over all S&P500. The update will be posted weekly.

Stay tuned!

Herculean Effort

I got pulled into a project that's in a 911 state. I am spending a lot of waking hours making sure that the damn application runs and all the major bugs fixed. As a result, I have not posted anything for a while, even though I have a million ideas in my head. That's life about a consultant, especially after you establish the reputation that you are "good". You get thrown into situation that drains so much of your life in order to save a project.

In any case, I had an interesting conversation with a colleague today. After he learned that I have incorporated, he asked me what's the difference between having an "S" corp and a LLC. It was a loaded question, but I understook he was asking about the tax aspect instead of the other aspects like legal, and such. Honestly, I don't really know if there is tax advantage having and "S" corp over and LLC. The only thing I could think of is the LLC is more expensive to maintain every year over and "S" corp. But if you are a small company, then there really is no difference. I did an "S" corp simply because for future sake. Just in case I want the company to be a "C" corp again if the business takes off.

What are your opinions?

First Step

Today is kind of an exciting day. My wife, after three years of hiatus, have decided to make a come back as start our little internet business again. We were doing this toys business for a while. My wife is a very knowledge toy collector and can identify gems hidden in junks. Before the explosion of Ebay, we were constantly able to find people willing to unload their old toy collections for what's considered a handsome amount of money for old junks. Most of them were, in fact, old junks. However, we were always able to find items in those collections that were worth more than the money we paid for the entire lot. We used to run a couple of sites to sell different collectables to the collectors community. However, by 2002, we found that increasing, people were selling their stuff off individually, and asked for rediculous amount of money for any old junk. By that time, we decided that the margin was getting so low that it's not longer a feasible business model. Today, only one left, www.jemandfriends.com. It's mainly just a message board now. We maintained so the Jem collectors have a community that they can go to.

In the past 6 months, I have dreamed up another internet business for her and it is again something she enjoys to do very much. Today we took the first step. We spent over $200 to get started. The site isn't ready yet, I am waiting for her to do the magic with the $200 initial investment. Hopefully this site will be started sometime soon. By that time, I'll talk a little more about it and give out the URL.

Isn't capitalism great?

My Debt

I touched upon the subject about debt in my last post. I happened to mentioned that I have loans on my two new cars. I can consider that my sore spot in my balance sheet. Or maybe not.

I bought them in 2003, and took out loans with GMAC. At the time, my old Explorer was about to die on me, and my Saturn SL1 lease was about to end. I wanted to replace them with fuel efficient cars that are also reliable. We have always been a Saturn family, so we turned our attention to Saturn first. This time around we were going for buying instead of leasing. I could have easily afford to pay cash to buy two new (my wife's preference), or used (which I prefer) cars to replace them. But when I saw GM was giving their cars away, I jumped it. I got my 2 new Saturn IONs with GM Supplier-Discount, plus the $1000 rebate, plus the 5-year, 0% finance. I figured that GM was probably losing about $2000 to me for each of the Saturn that we bought. Plus, by buying new, we got rid of the repair expense and the headache of putting them in to the shop, and the time loss. But the biggest thing for me is the 0% finance for 5 years. Instead of $32K out of pocket rightaway, I get to invest that same $32K in the market. If anyone of you track the market, the S&P500 went up 40% in 2003. And I didn't even pay a single dime on the money what was supposed to be GM's, for which I have used to create $12K of wealth.

Some people may say "yeah, but you still have consumed over $32K." To that, my answer is that

1. I would have spent some money to get two cars anyway. The transportation cost is unavoidable.
2. By holding on to my own money, I have made the money back for the purchase with the interst-free loan

So with that, I can argue, "no it's not a sore spot." I just can't wait till the bills go away soon so I can save faster.

Good Debt, Bad Debt

When I was typing the title, I chuckled a little because it sound like "good dad, bad dad". A good title for a TV drama series.

Actually it has something to do with the topic that I am going to touch. A lot of people talk about eliminating debt online, through their blogs. I encourage these folks to continue what they do. However, I sense that not everyone understand how debt works. There is a general "debt-phobia" going on. I think part of it is, in a traditional households, dads (or moms) don't teach their children about money properly. Or they are just plain as ignorant about the subject of money.

In a earn-consume household, where saving is on the back-burner, debts are always really really bad. The debt you accumulated gets larger and larger because you can't pay the bills back, and the interest just pile and pile on top of it. Worst, the banks start to change your interest to higher rate because you are "risky." But in a different circumstance, debt isn't your enemy, it's a friend. Imagine, if you have $300K. You can blow that money out by spend it. Or you can buy a house so you have something on top of your head to shield you from the elements. Or better yet, use $60K for the down payment, and take out of a loan, use the rest of the $240K for a investment. If the interest on the loan is 7%, and your investment is 10%, if you are 3% ahead of the game! In the business world, we call this "leverage". It's simply using other people's money to make more money.

I will get on this subject more in my future posts. The general rule of thumb is, if the debt you acquire makes you money, more than covers the interest that you have to pay for it, then get as much as your risk tolerance lets you. Otherwise, run as far and as fast away from it as you can.

Tricks About Reducing Debt

I happened to visited quite a bit of the "debt reduce" blogs lately. Not that I have debts to worry about. (Technically, I do have debts. I have my home mortgage to pay for. I have a mortgage on my investment property, and I have the 0% interest loan on my two cars) I came from an immigrant family and my parents taught me to save for the rainy days. I was curious about what the rest of us is doing about debts.

I came across a post by a blogger proposing a trick to "get rid of one cable bill a year," so by Christmas time, you'll have that extra money for buying gifts. At first I thought it was some suggestion about reducing the package to what you really watch, or cancel the cable service for 2 months a year, or something in that fashion. Reduce and save. No, the blogger proposed to pay 10% more each month for the cable bill. Hench by December, you have already paid your bill and therefore you "got rid of one bill."

To me, that was so ludicrous that it was almost funny. First, if you can't trust your spending habbit, you should have a budget. I have a budget for myself, and for my wife. When it was just me, it was lot easier to control. But when we started a household together, it's a lot harder to track what goes to where. A budget is a good way to keep things in order. Secondly, why in the world would you pre-pay a service that you haven't received yet? It is just such a bad practice it give me a the chill even just think about it. What if the service is interrupted, can you get your money back? How about the lost of capital gain while the money in other people's hand all the while it should've been in your own hand? The single biggest cash cow for banks are the checking accounts. They gave the banks a chance to hold on to other people's money without paying a single penny in interest. They then turn around and lend the money out for 8 or 9 percent in loans! Talk about free money!

This kind of reminds me of time-share as well, or what I call, "pre-paid hotels". I am not going to get into this subject because it would be a long rant.

Inflation?

I wasn't aware of the core CPI that the economists use don't include energy and food prices until two years ago a friends of mine from college, who went on to become a bond trader told me that. Really? That was a shock. He told me that such commodities are deem to volatile to be counted in order to get the true picture of the economy. Really?

And here comes the piece I picked up from reading the Build-A-Bear Workshop's latest 10-K:

The profitability of our business depends to a certain degree upon the price of petroleum products, both as a raw material used in the production of our animal skins and as a component of the transportation costs for delivery of inventory from our vendors to our stores.

It seems as if those economists are living in a vacuum world. Of course, if you exclude so much from the CPI, the only left is services cost. And services cost are mainly just , wage cost. Think all those Wal-Mart employees and restaurants waiters and waitresses. So we have a rapid rise in the basic necessity for the working class, while the wages are not moving. Is this good for the economy? Is this good for the country? I don't have to read the book "Nickel and Dime" to imagine what it is like.

I Can't Get No Satisfaction

A lot of people get satisfaction from investing when they check their accounts and find them up, say 5% this month, or 20% this year. The problem is most of them aren't looking at it from the big picture. What if the market is up 30% the year when your account is up 20%? Doesn't seem so good does it? Or what if your account is down 5% while most everyone else lost over 30%? I remember being depressed about down 8% in 2001. But it wasn't so bad when you notice that S&P500 was down 45% from the peak.

Ultimately, I would love to duplicate the results that great ones like Buffett, Fisher, Munger, Ruane, Lampert had posted. My current goal is to beat Mike McCormick, my money manger with my own self managed investments. Don't get me wrong. I love mike. Mike made me a lot of money, and I doubt I would ever take my money out from my account managed by Mike. Mike works for my former employer Gilder Gagnon Howe & Co. He's one of the wiser manager that weathered through 2000-2001 tech melt-down with minimum damage. My only regret is that I didn't switch the rest of my accounts to under his management soon enough. Although it was very fortunate that I had my biggest account started with Mike.

To beat Mike would be my ultimate satisfaction. Whether I have an up year or down year. I remember reading a book back 4 or 5 years ago about great investors are sucessful because they enjoy the investing, perfecting their tools and techniques. Profit is simply the by-product. Too bad I don't remember the title of the book nor the author. But I took that advice to heart.

Incidentally, I am going to beat the market this year with S&P500 seems to just break even this year. I will face quite a bit of tax liabilities this year because I have a rather huge amount of realized gain from the specialt dividend, and cash received through mergers. All that profit should make me happy, except I still can't beat Mike. I Can't get no satisfaction.

About Posting Net Worth

I was reading a list of networth-related blogs today, and the thought of posting my own net worth came up again. I have thought about doing this before, but every time I shut down the idea after giving it a little more thoughts.

The primary reason is privacy. Not from the rest of the public but from those prying eyes of the Big Brother. I don't know if one day the IRS will run some sort of scan throughout the internet to find candidates for audit. Not that I have anything to hide, but I rather lay low. There is an old saying in Chinese, "Gun shots are only fired at those birds that stick their heads out." Therefore I only track my networth in my private machine, off the network.

What do you think?