Posts Tagged ‘wall street’

Learn how to invest, read stock analysis, and find stock picks

Wall Street: Got What it Takes?

June 17th, 2008 by Jae Jun

As I was reading Where Are the Customers’ Yachts, there was a little aptitude test which I found amusing that looks at whether you have what it takes to do well in Wall Street, Old School Style. Ready to take it yourself?

A Little Aptitude Test

Note that this book was first published in 1940 and during this time, there were no computers or internet so the Street made money by selling securities manually and in person.

“If you have to hesitate in answering them, count the answer wrong.”

  1. Do you perceive quite clearly what is the objection to playing roulette wheel that has two zeros on it?
  2. If a man has tossed a coin “head” four times in succession, which do you think he is more likey to toss the fifth time, heads or tails?
  3. When do you consider that it is a good purchase to draw one card to an inside straight? (An inside straight draw is a hand with four of the five cards needed for a straight, but missing one in the middle. For example, 9-x-7-6-5. )
  4. If you answered (3) correctly, do you find that when you are actually playing poker for money, you can always resist making that draw?
  5. If a stock which is not paying any dividend is split two for one, how much good does that do the stockholder?
  6. What is the primary purpose of a business enterprise?

Here are the answers.

  1. If not, don’t bother to be a finacier; be a roulette player.
  2. If you think he is more likely to toss either heads or tails, look into the interior decorating game.
  3. When you are playing for soybeans. (When you don’t have anything on the line)
  4. If not, stay home with your money and start practicing being a miser.
  5. If you think it does him any real good, come and join the sales department, but steer clear of the trading department.
  6. The primary purpose of a business is to make money.

How’d you do? Got what it takes?
Seems like I certainly don’t.

Advice of the Day

There are two rules for success:
1. Never tell people everything you know.

Tags: wall street
Posted in Book Reviews, Market Noise | 3 Comments »

A Nice Magic Trick: Mutual Funds

June 14th, 2008 by Jae Jun

I don’t like mutual funds. Not because of the excessive fees and not because 95% (or more) underperform the market. I don’t like or invest in mutual funds mainly because I don’t have the temperament for them and I can’t stand their sleight of hand.

No Patience

First some background. My current investment assets are ALL tied up in my 401k account and since I can’t take that money out till I’m 60, it forces me to think for the long term. I also only invest in individual stocks on my 401k plan (If you have this option on your plan, you should really take advantage of it). No mutual funds for me. I have no patience for them.

It may seem contradictory that a supposedly value based investor has no patience, but I find my patience levels for stocks and mutual funds are on completely different scales. When I invest in individual companies I begin to understand the company as a business partner. When I invest in mutual funds, I see only YTD returns and charts.

Common Mistakes

Before I started to learn about investing, I did invest in mutual funds. I figured that a “guaranteed” 10% return would be great. Along with that naivety, I found myself following some common traits.

  1. I looked at the percentage gains and chose funds based on the previous years returns.
  2. I chased after rising funds.
  3. I somehow always seemed to look at “growth” funds.
  4. I switched between funds like a race driver switching lanes.
  5. I figured a 2% expense ratio didn’t affect my investment returns.
  6. I had no idea what I or what the mutual funds were doing and I didn’t do anything about it.

Now 1-5 are all common silly mistakes but the real problem was no. 6. I didn’t know what was going on. Since I didn’t know what I was doing, I was making the first 5 mistakes.
So why wasn’t I doing anything about it? If you read my about me page you would know that I believed I was incapable of investing on my own. But here I am doing it old school style.

Fast Forward with Clarity

I began to notice a trend whenever I went out to a restaurant or even a health supplement shop and asked for a recommendation. Guess where the salesperson always led me? Straight to the highest margin product. Sure they would mention something about another product, but the conversation would quickly focus again on the high margin product.

Witnessing this time after time, a question finally popped into my head. Are brokerage firms or financial advisers trying to sell me something based on margins or commissions without much regard for my financial future? For the majority, the answer is YES. They are all businesses and like all businesses, they need to sell something, sometimes anything, in order to make a buck. This means mutual fund companies have to sell the good the mediocre and even the bad funds. They will pass it all off as good funds of course.

Mutual funds also spend truckloads of cash in advertising and marketing to seduce the first time investors by claiming “performance figures” and diversification, but with so many companies in a mutual fund, there are sure to be bad companies in the mix. The truth is that mutual funds are a product of the financial markets so that companies can make money. Not to make you money.

I’ll end this with a Munger quote.

When you mix raisins and turds, you still have turds – Charlie Munger

Advice of the Day

Throw your rubbish in the bin. If it’s too far, throw it from where you are.

Tags: mistakes, mutual funds, wall street
Posted in Investing Perspective | 4 Comments »

Wall Street Myth – "Invest Early"

February 14th, 2008 by Jae Jun

Wall Street tells you to invest as early as possible in its mutual funds or whatever it is trying to sell. Just another myth you are led to believe. Investing early does not always guarantee greater wealth. I will try to show that starting at the age of 20 isn’t all that different compared to starting at 30, 10 years later!. Let’s see why.

Wall Street vs Old School Investing

Wall Street proudly boasts that investing in its mutual funds wil yield approximately 10% return. They “forget” to mention that after taxes, commission and fees, the 10% would probably be lowered to 8% or so. But we’ll stick with the 10% in the example I provide later.

However, investing in an Old School style of waiting patiently for great companies at depressed prices and then wait until it reaches its intrinsic value will bring opportunities that can definitely yield 15% and beyond.

The Super Best Investor Club

Four friends all start with $10,000. They have just graduated from high school. As graduating gifts, they each receive a sum of $10,000 from their relatives and friends.

A few assumptions before I move on.

  • Wall Street return: 10%
  • Old School return: 15%
  • The return could be less than or greater than 10% or 15% but we will consider the boundary case since I just want to show the average results
  • Each person does not deposit anything more than the initial amount
  • Each person invests for 20 years
  • (You can download the different scenario calculations here.)
Investor No. 1

No.1 has always been interested in investing. Now that he has the capital, he places it all into a typical Wall Street hyped mutual fund. He starts at the age of 20. He is considered the benchmark by his friends due to his eagerness and early start.
Return after 20 years: $67,250

Investor No. 2

No.2 is a patient Buffett type investor. He has his money in a money market, which grows at 5%. He sees that friend no.1 has started investing and so he decides to study and wait for opportunities. He waits patiently until a good opportunity pops up and then buys it at excellent prices. He averages 15% return from solid investments.

We assume that no.2 only find opportunities every 2 years. He then holds for 3 years and sells, which by then has reached its intrinsic value. He waits another 2 years, holds for 3 years and so on.

Return after 20 years: $79,047
Return difference vs Investor no.1: + $11,773

Investor No. 3

No.3 is even more Old School than investor 3.
His money grows at 5% in a money market.
He usually finds an opportunity every 3 years, and then holds for 5 years. This pattern continues up to year 16. From years 17-20, his return is an industry average 10%.

Return after 20 years: $79,395
Return difference vs Investor no.1: + $12,100

Investor No. 4

No.4 is a late starter. He ejnoyed his life partying hard during his 20’s.
Throughout his 20’s, he had his money in a money market fund growing at 5% for 10 years. Finally, turning 30 and seeing his friends accumulate wealth, he follows the Old School style and manages 15% return for the next 10 years.

Return after 20 years: $65,898
Return difference vs Friend 1: - $1,377

What Does This Tell You?

If you had started investing when you were 16, I’m sure you will benefit. BUT “investing as early as you can” shouldn’t be the default cliche to splurt out when teaching young people or those that want to start investing.

Friend 4 started 10 years later than friend 1, but he was less by only $1,377 after 10 years. The other two friends were not constantly in the market. They were not constantly ‘investing’.

Rather than chasing mediocre opportunities here and there and everywhere, wait patiently with cash on hand until a great opportunity in a great company appears. Invest in great businesses with logical and objective reasoning and analysis, with a large margin of safety and you will trounce the market.

“Investing is most intelligent, when it is most business-like” – Ben Graham

“Invest early” is a myth. Investing in great businesses at the right price is not.

Download Section

Calculation of different return scenarios.

Tags: invest early, myth, wall street
Posted in Investing Perspective | 6 Comments »

Old School Value vs Wall Street

January 27th, 2008 by Jae Jun

In response to my post on the valuation of AAPL, an opinionated user posted this reply on Google finance and so I responded. I don’t mind attacks if it is intelligent and knowledgeable, but if it is based on blind irrationality with no facts or logic other than sheep talk, then I will be hell bent on having lamb chops for breakfast.

See below the for reply and response.
=======================================================
From: suzy.de…@gmail.com
Date: Sun, Jan 27 2008 5:24 pm

First flaw in your calculation:
1) You use buffets’ 4-5 year running averages (for earnings)? Warren says that he doesn’t get tech stocks at all. So these are not-applicable to high growth companies, he tends to look at more established and lower growth companies. Averaging out earnings increases proves that. Evaluating Google by the techniques you’d use on say 3M or Ford, would mean their stocks would have an intrinsic value of what? $130 as well?

2) 1998-2004 is pretty irrelevant to stock performance from 2004-2008 and on to 2010 or so.

3) There’s many reasons why wall street doesn’t use CROIC, mainly because it only makes some sense in some areas. PE, FPE, EPS, all better indicators of a stocks past and probably future performance. In the end you used flawed variables, flawed methodology, and flawed logic to calculate a flawed result — your valuation for AAPL. And why is it flawed? Well, because those aren’t the numbers most people care about when investing in Apple, and it does absolutely nothing to factor in future shifts-in-market and so on.

Again, that makes sense if you’re buying a company that makes something, and is always going to make that same thing. Mining concern, a textile factory, insurance company, and so on. But it makes no sense in companies like Apple, which has remade itself a few times now. And will do so probably 3 more times before your 20 year calculation runs out. A few years ago, Apple was 80% about Mac Proprietary Hardware, 10%
about Mac software, 10% about peripherals. Now Apple is about 40% Mac Hardware (all practically off-the-shelf in better packaging), 10% about Mac Peripherals and software, 40% about iPod & iPhone hardware, and 10% about the software and peripherals and licensing support that. That’s a big move. Where will Apple be in a few years? I don’t know. I suspect the Mac will be far larger, and about 30% of their business. Probably 20% iPod’s, 20% iPhones, and that leaves a large chunk of other. I don’t know what that other is — but Steve Jobs / Apple has proven they are good at finding that. You did nothing to factor in the $18B that Apple has in cash, or what they might do with it. It is a flawed logic that drives forward by
watching the rear-view mirror. That’s what your valuation does. So if you’re buying Apple today for what they did 5 years ago (your averaging backwards valuation technique), then they’re not a good buy. But if you’re buying them for what they’re going to do, well then, they might just be a raging bargain.
================================================

From: Jae Jun
Date: Sun, Jan 27 2008 6:10 pm
Email: Jae Jun…@gmail.com

1) Buffett’s ‘earnings’ is not the earnings of wall street. Buffett specifically refers to earnings as ‘owner earnings’ which is the same as free cash flow. Plus the only reason Buffett does not invest in tech is due to his limited knowledge on technology. He doesn’t even use a computer except to play bridge online and read the Washington Post. If you also analyse Buffett’s holdings and companies, you will see that they are characterised as Large Cap GROWTH. Of course DCF methods can be applied to any company.

2) Sure 1998-2004 can be thought of as irrelevant but are you saying that the first launch of ipod in 2001 is irrelevent? I know the great things Steve Jobs has done so I even mentioned that I will only consider 5 years data. The look at the past 10 years is to see what the company has been doing, whether there was turnaround, why a few years where worse than the others etc.

3) There are many reasons why Wall Street doesnt use CROIC. Mainly because Wall Street only thinks 3 months at a time and only cares for EPS which can be totally manipulated even with GAAP. If you’re a Wall
Street lover by all means listen to everything they have to say, but I am analysing a BUSINESS for a long term investment in a value method. Sure I did predict the growth rate, but doesnt EVERYONE predict the 5yr growth rate? Look up yahoo, smartmoney etc and they will all have different growth rates. Some valid, some ridiculous. I dont agree with everything Wall Street has to say, so what?

Now, if you are trying to value a private company, where are you going to get the PE or EPS or FPE? Are you going to dismiss it because there is no such thing in the private realm? Those number just exist or cared for in the private businesses. They are just numbers that wall street loves. If you have looked at Enron’s PE or EPS during its run up, you would have thought the company had unlimited potential. Had you looked at owner earnings, you would have realised that something was up way before it happened. Boy was Wall Street wrong.

The reason why most people dont know about CROIC or the basics principles of investing is because people love to speculate and orgasm over the quick return. If you were able to think and question some of the things Wall Street says, you would be a very savvy investor. Following their every move is just another sheep in the making.

Immediately dismissing Discounted Cash Flow method that even wall street uses is completely ridiculous.
From your post, I assume you hold aapl shares and bought it over my calculated price of $130. Do I care?? Not one bit. If you made a calculated decision, good on you for acting on it. Just like you, I am making my own calculations. And I dont see the $18B in cash that AAPL holds. More like $10B. $10B in cash equivalents just means that the current stock price of $130 is made up of $11 cash. Therefore you can say the growth aspect of the stock price is really $119. Understand? If you think the sky is the limit for AAPL, just go about and do your thing. That euphoria feels good doesnt it? Until reality hits and you realise that price follows value.

My past 5 year analysis of AAPL allowed me to calculate a growth rate which I find conservative, so that I dont lose money. If that means my calculations will rule out 95% potential candidates, thats fine. Im
after the sure 100% bets. Im sure you have some valid comments but to disprove a DCF method that
has been used for over 60 years even by wall street analysts is absurd and requires that you try broadening your mind.

Tags: herd, mistake, wall street
Posted in Valuation Methods | 9 Comments »