Archive for January, 2007

I wrote about my college roommate that got by on $6 of food per week and I’ve decided that I’m going to play the Frugal Advocate for the month of February.

My plan is to buy large bags of beans and rice and a bag of chicken quarters and/or chicken breasts. I’ll try to keep the cost down to under $10. I’ll cook the beans, rice and chicken, create portions for each day for lunch and dinner. I’m going to allow myself to buy breakfast to keep from going insane from the monotony but I won’t spend more than $4 on breakfast.

I’ll buy the items tonight and do this for the whole month of February to see what happens.

My goals are to observe:

1. How much weight do I lose/gain.

2. How much money do I save.

3. What is my quality of life during the month of February

4. How does this experiment impact my family dining experience

I’ll post progress periodically to see how well I can live the “frugal” way of life.

This article epitomizes why I don’t ever use any debit cards with Visa/MasterCard logos. Generally, when I open a new checking account, the rep is always eager to get me hooked up with a Visa or Mastercard branded Debit card and I always request a regular ATM card with pin. On rare occasions, I will use my ATM card to conduct a transaction but those events are far and few.
I could never figure out why someone would choose a debit card vs. credit card when having both available.

If someone hijacks your debit card & pin they could potentially clean out your bank accounts (checking, savings, etc). That won’t ever happen with a credit card and your liability is limited to about $50.
If someone cleans out your checking account AND you have a few checks out, you’re likely to bounce all those checks and incur huge fees both from your bank and the person/business you wrote those checks to. I know banks may limit your liability with a debit card but these days banks seem all to eager to charge you fees just like the article points out.

Additionally, credit cards give you a 20 to 30 day float for your purchases whereas debit cards take money out of your account instantly. I just don’t get it…..why do people use debit cards?

American Express is a company that people either love or hate. I’ve come across websites dedicated to bashing American Express but I’ve had nothing but good customer service from this company over the years. The latest great thing they’ve done for me is forgive my stupid mistake. A few weeks ago I paid my statement via electronic bill pay and after waiting for 10 days to see the payment post I called them up rather upset about why it was taking so long (the funds left my account after 1 day).

The first agent told me that sometimes it takes a few extra days for the payment to post and that I should check back next week. I logged on today and checked the status of my payment again and still no posting. I double checked my electronic bill pay today and realized I had sent the payment to AMEX #1 (closed) instead of AMEX #2. I called up Amex and explained the situation. The rep offered to have the funds moved over to complete the payment to Amex #2. He also offered to refund any interest and late payment fees for the error.

I have to say I’m extremely pleased with the way they handled this compared to my nightmare with HSBC.

Comparing the two situations.

HSBC made the mistake and it took them almost 4 months to resolve the issue.

I make a mistake and AMEX offers to fix the issue within a few days refunding fees and interest.

Over the years, American Express has always been a great advocate whenever I have service or product issues and they’ve never let me down. I had recently canceled their gold card because of the increase in fees and change in the reward plan but I continue to use different American Express cards.
I hate to think what HSBC would have done if I had made a similar mistake with their account. I guess I won’t ever know because I’m in the process of closing down all my accounts with them.

The past two days I’ve written a hypothetical story about where investment ideas can be found but if you can change your mindset to OBSERVE everything around you when you’re somewhere the ideas will begin to come naturally.

Going to the mall to shop? Why not sit down for a few minutes and watch the people go by and ask yourself.

How many shopping bags are people carrying?

What kind of shopping bags are they?

Which stores are the fullest and which ones relatively empty?

If you’re a school teacher can you ask yourself:

Which publishing company has your school district purchased their books from?

Where do kids go to buy their school supplies?

What are the school supplies and who manufactures them?

What kind of cool gizmos do the kids have? Who makes them?

If you travel overseas for business frequently there are hundreds of questions to ask….

Which airlines do most people fly to this destination?

What kind of people are on board? What kind of gadgets do people have? Who makes them?
When you arrive what hotel chain do you stay? What kind of restaurant chains are popular?

What kind of cars are the local driving? How much gasoline do they consume?

Do you see cranes building scryscappers all over the place (e.g. China)?

What do I see most of the time? I see a bunch of zombies completely oblivious to their environment. I see this at the mall, I see this on airplanes, I see this in foreign countries, I see it everywhere. You don’t need a Ph.D in Stockology to find investment ideas; you don’t need to be a stock “expert” to make investment decisions. All you need is the ability to think, observe and take action.

Now would be a good time to check out some investment ideas over at http://www.etfcoveredcalls.com to see what opportunities exist via ETF Covered Calls. 😉

Yesterday, you opted to skip lunch and research some of the investment ideas you came up with during your first day at work.  You diligently printed out some news articles, researched the ticker symbols over at finance.yahoo.com, and printed the balance sheets, cash flow statements, and income statements.  You looked into the insider selling transactions and event checked out the stocks charts to get a good overview of where each company had been and where they are now.  Out of eight investment ideas you found only one that really peaked your interest but you haven’t given up yet.

As your second day begins, you start off by heading over to the copy machine to print a few copies of an agenda you have for your first meeting with your staff at your new building.  In addition to some hand outs you’ve also requested your IT group have a notebook and LCD Projector setup to go over an online presentation.

You head over to the copier and notice that the company has leased some new copiers.  The control panel is completely digital and has a cool touch screen.  You have various buttons that provide the following options:  Print Color, Print B&W, Scan, E-mail, More.

You’re impressed because your old copier had one button: Copy.  You notice the copier is made by KopyKing Inc.

Ding! Investment Idea 9 – Research Copier company.

You complete your copies and head over to the conference room.  You notice a keyboard and mouse sitting at the table but the laptop and projector you requested isn’t there so you call the IT tech.  The tech tells you to push a button on the table and as you do you notice an ultra thin LCD screen drop down. This thing is as thick as a cardboard box but the resolution is magnificent.   The tech tells you that you can access your files with the wireless mouse and keyboard.  In awe, you ask the tech who makes the screen and he tell you, “Blamsung.”

Ding! Investment Idea 10 – Research TV/Display company.

Your meeting takes a couple of hours and ends close to lunch time.  You missed lunch yesterday because you were busy researching investment ideas but you decide you want to check out that food court everyone in the office has been talking about.

You head out and enter the elevator.  You notice that a new LCD Display has been installed on the elevator and is now cycling through some ads.   It’s the same type of screen you just saw only smaller but it’s made by “Blamsung.”

As you reach the food court you look around and try to decide what you want to eat.  There are many choices: StarLux, Dickey M’s, Pizza Piza, Chik-fil-o, Quasnos, and many more.  You notice, however, that one shop has a queue 30 people deep and a crowd is gathered around looking at the menu.   You won’t be eating there today because the line is so long but you notice the name of the place and it’s called “3F – FatFreeFast” and the menu claims that their food won’t make you Fat, will be Free if it isn’t given to you within a Fast five minutes.  You recall seeing their logo before and you realize that you had driven by the freeway and noticed the big 3F signs at least twice since you’ve started working at the new building.

Ding!  Investment Idea #10 – You’ve been thinking about going into business for yourself and your three biggest pet peeves have been slow service, fatty foods and low value when you dine out.  This could be a franchise opportunity!

You notice that after people finish their lunch they head over to StarLux and order a MegaLatte to take back upstairs to their office.  You’re surprised by how many people are queuing up to buy coffee.

Ding! Investment Idea #11 – Research StarLux coffee.

You head back to the office and decide you need to talk with the IT Tech.  The only research idea you liked from yesterday was PicoNano computers.  You love how tiny they are and how low their energy consumption is and you want to know how to get one.  You talk with the Tech guy and he tells you he loves the PicoNano for the same reasons.  He’s been recommending PicoNano’s to all of his friends and family.  He then shows you the server room and there are four giant cabinets full of PicoNano computers.  He tells you that company has standardized their entire operations on PicoNanos.   He mentions that you can buy them online at their website and they cost around $199.   You make some mental notes to order one online tonight and take a second look at those news articles, balance sheet, cash flow and income statements.

You have now begun to incorporate your every day activities and observations into potential investment ideas.

Every investment activity starts with an idea.   I’m going to walk you through how I pick up investment ideas on any given day.  I’ll run through this in a hypothetical scenario but it will apply just the same.

Hypothetical:  You work for company XYZ which has 700 employees.   You have money vested in your company 401k plan and profit sharing plan.  You have some extra money and you’re looking for some investment ideas.  Your CEO just announced that due to phenomenal growth they’ll be adding 200 more employees over the next year so you will all be moving to a new building in 4 weeks.

Four weeks later…..

Because your company completely moved from old location to new location they pretty much left everything behind and purchased all new “stuff” for your new office.

Day 1 – You arrive at your new building and the first thing you notice is how beautifully magnificent the new building property glimmers in the sunshine.  You notice the parking lot is nearly full and the building features a cool food court.

Ding! Investment Idea 1 – You notice a sign that reads, “This property is owned and managed by Glimmer Properties. Ticker Symbol: GP”

You walk up to your new office area and the first thing that hits you is that new office furniture smell.  Leather and Oak aromas fill your palette as you glide through the hallways.

Ding! Investment Idea 2 – Many of the tags are still attached to the furniture so you take a look and notice that everything is manufactured by Leather & Oak Furniture.  Ticker Symbol: LO.

As you sit at your new desk you notice your brand spanking new phone.  The phone has a curious logo that reads, “22nd Century Phones” and has a tag line “VOIP Capable.”  You are not entirely sure what all that means but you do notice that everyone has this phone and your company just bought 1000 of them.

You call up your friend to tell her about your new digs and your cool new phone and she mentions that they just got the same new phone system too!

Ding! Investment Idea 3 – You look up 22nd Century Phones and find ticker symbol: TCP

You’re ready for your morning coffee so you head on over to the break room.  You are taken aback by the four huge vending machines.  The first vending machine sells a new energy drink call “Mega Energy” and you notice that the machine is already flashing “Sold Out.”   The second vending machine is selling iPods, Pre-Paid Cell phone cards and some cell phones.  The third vending machine sells snacks and the fourth sells regular soft drinks.

Ding! Ding! Ding! Investment Ideas 4, 5, 6 – Research Vending Machine manufacturer, research energy drink, research cell phone Company.

You head back to your desk and notice a tiny metallic box on your desk.  You’re not sure what it is but there is a button that reads POWER.  You push the POWER button and notice your LCD screen flashes on.  You realize that the tiny box is your new computer.  You flip over the tiny box and it reads, “PicoNano PC – the most energy efficient PC in the world” and below that it reads, “Manufactured by PicoNano.”  You look around and notice that everyone has one of these new computers.

After your machine starts up you notice that the computer screen is a little different.  This computer isn’t running your typical “Windows” software but something called “SecureOS” that looks nearly identical to Windows but it’s a little different.  You get the feeling that it’s more secure.  The software is made by a company called “Spinach Inc” and its ticker symbol is SPIN.

Ding! Ding! Two more investment ideas right here.  PicoNano and Spinach Inc.

You realize that your company has just spent some serious cash on relocating to a new building, buying new furniture and office equipment.  You know they could afford it because your bonus last year was 20k and you look forward to the company’s continued growth.  You also realize that the company employs some of the best people in the country and they’ve clearly researched and analyzed the benefits of each of the products you are now using at your desk and the company expects a great return on their investments.

By simply observing your every day environment and activities you’ve managed to pick up 8 investment ideas on your FIRST day at work at your new building.

At this point, you’ll have a couple of choices for lunch.  Go out to lunch and giggle about nonsense with your co-workers or order in, sit at your computer and start researching these companies as possible investments for your extra cash.

Tomorrow we’ll see how Day 2 will progress.  Preview: You’ll be having your first conference room meeting, you’ll be making some copies, and you will go down to that food court for lunch.

From Wikipedia: In colloquial usage, a fractal is “a rough or fragmented geometric shape that can be subdivided in parts, each of which is (at least approximately) a reduced/size copy of the whole.”

See the pattern?

About a year ago, I took the kids to the zoo and we came across a magnificent tree. It was a tree about 30 feet tall with branches expanding at almost equidistant levels throughout the tree. Upon closer examination the tree clearly followed the Fibonacci sequence as its branches expanded out from 1, 1, 2, 3, 5 and on. One trunk expanded to one branch, one branch expanded into two subbranches and those branched out into small branches. It was beautiful butI didn’t have my camera so I don’t have a photo of it but you can see the pattern in the flower below.
See the pattern?

This brings me to ETFs. ETFs are derivatives, they derive their value from their underlying stocks. These stocks (some but not all) have options that are traded on them as well. The options are derivatives of these stocks. Writing covered calls on an ETF is essentially writing a derivative instrument on a derivative instrument. See the pattern?

I have a primitive graphic to help illustrate a component of ETF Covered Calls and how it pertains to derivatives of derivatives of SMH.

SMH_Comp1.png

SMH is composed of many stocks. Three stocks however represent 52% of the holding (the big branch 😉 ) and the remaining stocks represent smaller and smaller amounts (smaller and smaller branches). When examining the main three stocks and looking at their options for January 2008, you can see a fairly robust return of about 17% for in/near the money calls for these stocks.

My crappy graphic is no comparison to mother nature but if you can use your imagination a bit you might begin to see the pattern. I don’t know what methodology ETF creators/designers use when creating indexes and I’m not sure if the fractal & Fibonacci patterns are by design or randomly occur because of human (mother) nature but it’s always interesting to see the patterns form.

Why did I pick January 2008? Because one of my goals is to earn 20% per year and picking the right ETF(s) means looking a year ahead. I created this post because a reader asked how I went about picking my ETFs for covered calls. I have many different components including using a custom built ETF-Cashinator application and observing patterns & trends (not technical charts).

In this particular instance, a strong trunk (SMH) leads to strong branches (TXN, INTC, AMAT) which lead to strong sub-branches (Options) which come back to make a beautiful tree (Covered Calls on SMH).

I have a theory as to why non-capitalist types behave and offer the advice they do. Before I tell you, I must take you in my little time machine back to my college days.

During my college years I encountered a girl named Sara in one of my classes. I thought Sara as a bit unusual in that she had purple hair, metallic objects piercing numerous areas of her face: nose, lips, ears, tongue and eye lid. She wore heavy dark makeup (usually red or black) and dressed in dark colours all of the time. Initially encountering Sara was a bit intimidating but eventually I got to know her and began to formulate an understanding of her personality.

Sara, it turns out, was a rather frightened and timid girl. Because of my preconceived notions and prejudice it never even occurred to me to consider this girl as chaste but she indeed was very innocent. I ultimately discovered that her whole persona existed to protect herself from the judgment of others.

Sara would much rather you dislike her for her piercing or her purple hair or her “weird” dress than for you to judge her for herself. She wore her “costume” as a shield against criticism from others. When someone did criticize her, she would lash out with witty retort and self-satisfaction. I don’t know how she got to that point or what factors were behind it but I understood how she existed during her college days; she really didn’t want to be burdened with being popular or beautiful or anything else superficial –she just wanted to get an education.

Fast forward the time machine back to today and I see similar parallels between Sara’s costume and the ones worn by non-capitalists.

A non-capitalist creates the “frugalist” persona in an effort to deflect criticism. The “burden” of creating extra income is lowered if your standard of living is lowered. If you can convince everyone not to buy a new car then your burden of buying a new car is gone. If you can convince everyone of shopping at second hand for clothes then your burden of shopping for clothes is gone. If you convince everyone of not buying an HDTV then the burden of owning one is gone. If you can convince everyone of not being superficial then your burden of superficiality is gone.

In theory, this is probably a great approach but in practice it would lead to economic collapse. In theory, Sara’s “costume” was great to get her through college but in practice she’d have a hard time getting a job in the corporate world.

Keep in mind that I’m not passing judgment on anyone. I really don’t care what kind of car a person drives, the type of clothes they wear or whatever. I am simply trying to apply psychological behavior to behavioral finance and what drives some bloggers out there.

Greg, a reader, posted a comment on a post that started with the following line, “I think the issue is that a lot of people just don’t see the long-term consequences of their actions.”

The comment was related to a post I wrote entitled, “Everyone Has A Vice” and was talking about something else but it gave me some food for thought.

What really bugs me about PF Blogger “advice” that starts off with “Don’t buy a new car” is that the writer really hasn’t bothered to stop and think things through thoroughly.  In essence, many bloggers don’t think about the long term consequences of their suggestions.   Most PF bloggers will easily whip out some calculations and illustrate that if you start investing at age 18, with xxx amount of money, you’ll have xxxxx amount in 40 years.  “Think about the long term consequences of not investing early”, they’ll say.

But on the flip side, these same PF Bloggers completely forget how an economy functions and dole out advice like “Don’t buy a new car.”

What are the long term consequences of that advice?  Let’s walk through it.

1. Everyone stops buying new cars on the advice of pfbloggers because this will supposedly make them rich.

2. GM, FORD, Toyota, etc stop making new cars because no one is buying them.

3. The Auto Manufacturers file for bankruptcy and lay off all workers.

4. With no new cars, dealerships nationwide close down and lay off workers.

5. Federal, State & City governments that relied on tax revenues from these industries lose tax revenue.

6. Federal, State & City governments furlough workers.

See the pattern?

Wait it gets worse…with NO NEW CARS on the market the PRICE FOR USED CARS SKYROCKET!   That’s right, it turns out that new car buyers, in essence, were subsidizing used cars buyers but now those new car buyers are buying up all the used cars to “save” money the used car market becomes red hot.

I’m not advocating that everyone go out and buy a new car and you should clearly live within your means but if your means include enough income to buy a new car then consider doing it.

Tomorrow I’m posting a theory as to why I think many PF Bloggers give this type of advice.  It’s just a theory but I think you’ll find it interesting and/or amusing.

If you missed my first post, you’ll want to read it here.  Today is Options Expiry and it looks like SMH will close below the $35 strike price which means I get to keep the $850 (2.5%) premium AND I get to hold on to my shares so that I can write February 07 or May 07 Calls.

But what I really want to illustrate is how much mutual funds suck.  Click on the graph to follow along.

SMHvsSMPSX2.png
If I had bought SMPSX (Semiconductors Mutual Fund) back in December 2006 at $17.34 I would be down 6% today.  I know what some of you are going to say…..”Great time to dollar cost average down….blah…blah…blah”

Perhaps it is a great time to dollar cost average down and perhaps you’ll eventually make up the loss but while you’re busy dollar cost averaging down I’ve made $850 in cash that’s sitting in my account and I STILL own the shares of SMH just like you STILL own the shares of SMPSX.  Look at the chart, the graphs lines are nearly identical except one of them generates cash flow (SMH) while the other just sits there waiting for something to happen (SMPSX).

Where do I go from here?  I’m bullish on the semiconductor industry so I’ll hold for now.  I have many options from here:

  • Sell February 07 $35 Calls  (currently $0.28 = 1% additional return)
  • Sell May 07 $35 Calls         (currently $1.25 = 3.6% additional return)
  • Sell August 07 $35 Calls    (currently $2.15 = 6.2% additional return)
  • I can wait until SMH breaches $35 then sell May or August Calls which would yield higher returns.
  • I can liquidate now and break even
  • I can straddle or do some fairly exotic things

What can a mutual fund holder do?

  • Buy more (to dollar cost average)
  • Sell Fund and move to greener pastures (at a loss)

While I’m selling and making money you’re waiting and buying (spending money).  Remember:  YOU MAKE MONEY SELLING STOCKS NOT BUYING THEM.
Is it sinking in yet?

If it is, go over to www.etfcoveredcalls.com to check out how I’m putting it all together.

Please note that the trading day still has a few hours left as I write this and SMH could rocket up to the moon in which case I’ll be forced to sell at $35 and only capture 4.6% return in 42 days but I’d be ok with that scenario too 😉