Lazy Man and Money

Skip the Product, Buy the Investment

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I’m going to start this article with a couple of housekeeping notes. I hope all the father’s had a great day yesterday.

I know I did. My wife and kids took me to Gillette Stadium (home of the New England Patriots) where I could walk on the field and tour the locker room. It was great to walk on the field and think, “This is where the magic happens!” The biggest draw was the locker room tour. On Tom Brady’s locker there was a motivational “poem.” It said (paraphrased):

1. There are people who “+”
2. There are people who “-”
3. There are people who “X”
4. There are people who “÷”

Surround yourself with 1s and 3s. Ignore the 2s and 4s.

Unfortunately, cameras weren’t allowed in the locker room, so I couldn’t get a picture to give you the exact wording. I tried to find the source and closest I came was this Tweet by Jalen Rose:

The connection makes sense as they both went to University of Michigan with Rose leaving the school as Brady was entering it.

(If anyone can sleuth out the whole thing and post it in the comments, I’d love them forever.)

I have one more quick housekeeping note before we get on to the article. I hope to be writing a lot more in the coming weeks. Camp has started which translates to 2.5 hours more of kids’ care in the evening than I get during the school year. That’s a lot of potential productivity.

Buy the Investment, Not the Product

I was reading Joe from Retire By 40s article about thinking before you buy your first home. The main premise was that the house that you live in is a liability. The bigger the house the more the mortgage is going to be. That’s money that you aren’t going to be able invest. You also need to fill it with stuff. Utilities are also going to be higher for bigger houses in general.

That’s why I always say, “Don’t Buy Too Much House.”

However, Joe notes that real estate can be a great investment. After all that’s how Arnold Schwarzenegger made his first million dollars.

I came away thinking, “Buy just enough house to live in and invest the rest of money into an asset that someone else paying you for.”

iPod Nano, A Love Story

Allow me to illustrate the “Skip the Product, Buy the Investment” with the story of an iPod Nano. To borrow from Dickens, it is the best of examples and the worst of examples.

The iPod Nano came out in September of 2005. For $250, you carry a whopping 4GB of music in an extremely compact space. It was amazing!

You could have bought a share of Apple stock for $6.60 on September 2. While the stock went up a bit on the news, that month you could have bought around 38 shares of Apple stock instead of the iPod Nano (I’m rounding up a tiny fraction of a share, but let’s just attribute it to sales tax.) Today, 38 shares of Apple stock is worth $5548.

You could have made over $5000 if you were able to “think different.”

This is an extreme example, so let me balance it with a counter example. I bought the iPod Nano when it came out. A woman I was dating really wanted an iPod, but she grew up in a family without money. She’d been out of school for only a few years, but had a mortgage (with PMI) and some student loans. It didn’t really make sense for her to buy a Nano.

For Christmas, I surprised her with the iPod Nano and she was speechless. I luckily scored a better investment than buying Apple stock.

Today that woman is my wife. We’ll celebrate our 10 year anniversary next month.

Analysis of My Best and Worst Investments

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A couple of years ago, I decided to take a small portion of my retirement and actively invest it. Unfortunately, I didn’t do it in such a way that I can easily gauge performance. Fidelity’s tools aren’t all that great (or maybe it is that I can’t find them), but it is further complicated by the addition of new cash.

I’m kicking myself for setting up something so flawed. At the same time, I don’t know how I would have done much better. I don’t want to change my whole retirement structure so I can report performance on the blog (though it would be worth knowing for myself).

Like every stock-picking investment to date there’s been some good and some bad. I thought I’d review them and see what, if anything, can be learned from them.

I’m going to start with the good. It’s going to look like sunshine and rainbows… that’s the nature of covering “the good.”

  • Groupon – I dollar cost averaged at buying shares around $4 a share and sold them for around $8 a share. This is a rough estimate. I usually retain some shares in businesses that I believe in, but I just wanted to flip it and get out. I realized that I bought it for the wrong reasons. I bought it because I thought it was cheap and couldn’t get cheaper (downside protection is a common theme). It worked, but I wonder if it is more luck than skill.
  • Zenga – Much like Groupon, I bought it at a very cheap price… around $2.50 a share. I had confidence it wouldn’t go much lower because they had cash and real estate assets almost equal to $2.50 a share. It was like the company was valued at zero. It got up to around $4 and I sold. I didn’t believe in Zenga’s long-term business, so I got out.
  • Facebook – This was my biggest win. I bought shares that I dollar cost averaged at around $21.25. Unfortunately, I sold most of them at around $32. I still hold 25 fantastic shares, which at $94 is not half bad. Remember all that talk about the bungled IPO? Me neither. Remember the talk of ridiculous evaluations? Well at a P/E of 95 it isn’t cheap, but it isn’t crazy like Amazon either.
  • Google – I’m not sure this counts as part of my experiment because I bought so long ago. I bought at split adjusted $295 a share. At $665 today, it shows no signs of slowing down.
  • Apple – I loaded up at a split-adjusted $71 a share, but sold off a pile at $100 a share. It would have obviously been better to hold onto the shares, but I’ll look optimistically for a minute.
  • –

    • And now for the bad…

    • SodaStream – When it dropped from $50 to $37, I jumped in. Of course I’m smarter than the market and a small revenue miss wasn’t a big deal… especially in getting a 25% discount. Today it trades at $17. I had a few more trades in between where I made a few dollars buying low and selling a few dollars higher, but I took a sizable loss on most of the shares.
    • IBM – I bought it at around $170 and had a chance to sell at $200 a share while back. Now it is $160. I read it is Buffett’s biggest holding. I think he likes it for the same reason I do… a P/E of around 10. The revenues are shrinking every quarter, but they spend a lot of money buying back shares. They also pay dividends. IBM is in transition as it moves away from mainframes and chips and more towards cloud computing. It’s taking years and will probably take a few more, but I think it is going as well as could be expected.
    • Yahoo – I bought this because the money they were getting from the Alibaba shares essentially equaled the value of the company. I figure this gives me Yahoo’s business for free. I was up for a little while, but now I’d down about 7%. I think Marissa Mayer is very smart and I’m optimistic they’ll get things figured out.

    You’d think there would be a lot more bad in there. The “bad” is mostly in the form of lost opportunity. There are some investments that did nothing while the general market has gone up. My investment in Russia stocks is one example. My investment in Twitter is another example of money going nowhere.

    If I had to guess I’d say that it probably all comes out to market average. I did well with some and others I had essentially dead money. This reinforces what I thought all along… stock picking isn’t going to driver of wealth for me. I’m fine if I get market returns… or even slightly below market returns.

    Why would I be fine with below market returns? It’s a small amount of my portfolio. I’m learning a lot. I’m having fun. Losing or gaining a percent or two on a small amount of a portfolio isn’t going to add up to much over the long haul.

    All that said, here are the things I’ve learned about myself in investing:

    1. I Like Technology – I already knew that, but I had to point out the obvious here. Almost all of the companies mentioned are, at least in large part, software companies. (Apple is more software than most people think.)
    2. I Like Buying Cheap and getting Downside Protection – Even the big technology winners were bought fairly cheaply. It may be hard to remember it now but there were major questions about Facebook and Apple.
    3. I Let Loose the Small, Fad Companies – I viewed Zenga and Groupon as fads and I’m probably more lucky than good in making money with them.
    4. Don’t Necessary Buy What You Love – I’m a huge fan of SodaStream’s products, but that doesn’t necessarily lead to profits. I thought that their focus on healthy fizzy water and cost savings would be a winner with consumers, but I guess I was wrong. I can’t see why it isn’t in most households. I’m probably naive, but I keep holding on to a few shares hoping the general public sees what I see.

      It’s probably a very bad omen, but I did the same with shares of Palm. (Yes, I laugh at Samsung commercials showing off wireless charging, when I enjoyed a superior version of it back in 2009.)

    I think the #2 and #4 points are probably the best ones to take to heart. Even my loss in SodaStream could have been much, much worse if I didn’t buy on the dip.

    If I were to translate these insights into an investment today, I’d say that commodities look attractive. I’ve been saying that for some time only to see them lag the market or even lose money.

The Problem with Picking Stocks

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Last week, I excitedly wrote about my new stock play: Twitter. For those who have been following Twitter (pun not intended, but kind of intended), this has turned out to be a fantastic way to lose money in a short period of time.

I knew in picking individual stocks, I was taking on significant risk. What I didn’t realize is that the lock-up period for Twitter was coming in a few days. The lock-up period is when insiders at the company, who might have paid pennies a share get to sell at the current stock price. Buy shares at a few pennies and sell at $35 is a fantastic way to make money. Unfortunately, it creates more supply and price goes down.

I should have done this research as I did when buying Facebook. I didn’t. The egg on my face is well-deserved. I still believe it is a very good company and I intend to hold onto it for a long, long time so I used the opportunity buy some more and dollar cost average a better price for myself.

Even the Experts Don’t Get it Right

While I was try to figure out which hat goes best with egg-face, I got the June issue of Kiplinger’s Personal Finance. (Side Thought: Why do magazines always seem to live a month in the future?) The issue has an article about when to sell a stock. The advice boils down to, sell when the stock no longer meets your objectives.

Sounds good in theory, but one of their examples has blown up in their face since the magazine went to press. They say that if you love growth stocks and fell in love with Apple, you should unload it. They used the price of Apple on April 4th of $532. The last week of April saw Apple jump more than 10% to go above $585.

People invest because they want to make money. If you got to specific or cutesy about focusing on Apple’s growth, you missed the value. That laser focus would have stopped you from reaching your main objective… make money.

In fairness, Kiplinger’s does mention that Apple’s “bruised shares may attract bargain hunters”, so they’ve hedged themselves well.

Final Thoughts

You really have to know what you are getting into when you pick individual stocks. I knew the risks. On the other hand, over the past 18 months, I’ve done quite well. Perhaps this has lead me to have a false confidence in my ability to recognize good value. I openly admit that my dog could have picked good stocks in this market.

In any case, all individual stock picking is done with a small percentage of my overall portfolio. So even when I wear my egg face, it is a very small egg, and the rest of me is smiling.

Ask The Readers: Is this Trading or Investing?

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It’s been awhile since I’ve given an update on some stocks that I’ve been “travesting” in. I just made up travesting as a combination of trading and investing. Previously, I had mentioned how I had this crazy stock trading idea: buying because someone else paid a lot more for it.

Here’s an example with what I did with Facebook. I bought 100 shares $26.83 after it had dropped from the IPO at $38. My theory was that a number of smart people paid the $38 price and paying $26.83 is smarter than paying $38. I bet Mike Piper could write a 100 page book on the problems with that. I did look at things like earnings, projected growth and all that. I also made the purchase because I’ve seen how addicted people are to it. When people get addicted to things, there’s a lot of money to be made and smart people (like those at Facebook) will figure out how to do it.

Facebook recovered and went to $33 where I sold off 75 of my shares to lock in gains and play with the house’s money. Then Facebook dropped and dropped again. My remaining 25 shares at $26.80 weren’t so good when the stock got to $23, $21, $19, and lower. I ended up buying 125 more shares at $22.95 and 50 more $21.09. This gave me 200 at an average price of $22.97. I held on to those as it dropped to $19. As it recovered to $28.43, I sold 100 shares to lock in more profits. I still have 100 shares of Facebook that are well in the black now. If Facebook gets to $35, I could sell off half of those remaining 50 shares to get all the money I originally invested and keep 50 shares that would one could consider “free.”

There are few different investing methods are play here:

  • Trading – I realize that at times here I’m simply taking advantage of a stock being at a lower price. However, I try to invest in relatively safe companies that I don’t see going anywhere. Facebook isn’t going to financially collapse tomorrow. I also look to see if the price/earnings (P/E) is somewhat reasonable. This may sound funny if you look at Facebook’s price/earnings on many financial websites today as it ranges between 2000 and 3000. However, it was around 70 when I started investing, and this Henry Blodget article says that it is around 50 now. I think there is an accounting reason (updated this week with its latest earnings) why the stock is technically listed at those earnings, but fundamentally the 50 number is closer to what I’ve seen reported.

    That article also covers one of the other stocks that I won’t touch due to a high P/E: Amazon. I love Amazon as much as the next person, but it will be a long time before it gets to be any kind of value. Like Blodget says in that article, “I have no idea what [Amazon investors] are thinking.”

  • Dollar Cost Averaging as Stocks Get Cheaper – As Facebook shares were getting cheaper, I loaded up with more. I didn’t get close to buying them at their cheapest when it was $17 or so, but no one is ever going to buy at the lows and sell at the highs consistently. I had bought enough to get my average price down to $23. As the stock went back up, I was able to take some profits quicker than if I hadn’t bought at the low prices.
  • Buy and Hold – For all this trading, there is still a strong element of Buy and Hold. I’m not getting out of these stocks every day, week, or even month. The buying and selling of Facebook has happened over a few months and I could keep a final stake in Facebook for years.

Whatever you call it, it’s working for me now. It’s far from fool-proof as big companies do fail. A dozen or so years ago, I probably could have implemented the strategy with Worldcom and lost a good chunk of money never getting that rebound. I’m implementing a similar strategy on a smaller scale with Hewlett-Packard right now and it is a little risky since the company is trying to figure out its identity amongst declining printer, ink, and computer sales.

Bonus Related Thought: Apple

I’ve also started this strategy with Apple. If you look at an Apple chart over the past few years it looks like a classic bubble… except that Apple’s earnings justified the rise in prices. Margins for Apple are shrinking, but earnings are still extremely strong and you can buy it at 35% less than it would have cost you in September. It has more cash than it seems to know what to do with and the P/E sits at around 10… a bargain for a technology company. Lastly, as I said to some friends recently, I have no problem in investing in companies that people get addicted to. Apple and Facebook definitely qualify.

The Hidden Cost of Your Technology Buying Decisions

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Last week, I came across an interesting CNET article, Should I break up with my iPhone for Nokia’s Lumia 900? The article is a mailbag format, where people Ask Maggie questions about cell phones and pricing plans. In this case, Maggie is asking herself a question, whether it is worth switching to the new Windows Lumia 900 or get the new iPhone 4S.

Maggie has used the Nokia Lumia phone and admits that she likes it. At one point she notes, “In fact, I think I’d say that it’s even easier to use than an iPhone, which may sound like heresy to some Apple fangirls and boys out there.” It also is a high-end phone with all the premium features. However, you know I wouldn’t write about it unless a financial factor was part of the decision. Maggie breaks it down:

“But the most attractive thing about the Lumia 900 is the price. AT&T is selling the device, which has 16GB of storage, for $99 with a two-year contract. Meanwhile Apple’s iPhone 4S, now six months old, would cost me $200 for the 16GB model. The price difference is only $100, but with Apple’s extended AppleCare warranty, the difference is really $200. Given that my last iPhone didn’t make it a full two years before it died, that’s definitely something I should consider.”

So it seems like a no-brainer, right? It’s the cheaper and better phone. This has got to be one of the easiest questions Maggie has ever fielded. Not so fast…

Maggie goes on to explain why it isn’t so easy in a section called, “Apple’s stranglehold on my life.” Specifically she says:

“But sadly now I’m feeling a bit stuck with Apple. I’d like to check out other smartphone platforms, but doing so is going to require some work on my part. Like many who have been sucked into Apple’s clutches, it was innocent in the beginning. The iPod was so simple to use. And iTunes, while not the best user interface or music service, was also simple and safe at a time when I was too much of a scaredy-cat to be downloading or sharing music illegally.

Initially, I didn’t realize the commitment I was making. I didn’t think about the fact that I was locking myself into a platform for the rest of my life. But with each new product I bought from Apple, the deeper I fell into the borg. And now I feel like it would be painful to break up with Apple. Not because I love the products or company so much, but because it would be a huge pain in the butt to transfer all my stuff to a new platform.”

There lies the hidden cost of your technology buying decisions. A decision that Maggie made years ago, has come back to haunt her wallet. This is why, whenever I buy into technology, I always factor in the decision to migrate away from the technology. I ask myself, “If this company were to disappear or become prohibitively expensive, am I in a position to switch to something else?”

In the end Maggie makes the decision to stick with Apple and only get pulled deeper into the Borg: “At the end of the day, I was impressed with the Lumia 900. I like the Windows Phone OS. And I definitely liked the $99 price tag from AT&T. But for someone like me who is already locked into Apple, it’s simply not worth it to go through the struggle of re-establishing my life in Windows Phone for this device.”

This time the $200 wasn’t enough. I wonder if she’s factoring that $200 every couple of years that she remains locked in.