Announcing the INVESTools Forum

We’re pleased to announce our new INVESTools forums. InvestorGeeks is one of the top ranking sites for web surfers looking for information on the high-end investing toolkit called INVESTools. Last year we wrote about the product in an article called “Phil Town and INVESTools.” In that piece we investigated whether these two new faces in the investing community were scams or merely fads. Not only did we find the reviews favorable, we concluded they were here to stay.

Now based on user feedback, we’re pleased to announce the INVESTools Forum whose mission is to act as part support group/part watchdog. We hope you enjoy it, and if you’d be interested in helping out, please let us know!

Getting Started with Margin Trading

I’ve been doing a little research on margin trading, because I’ve recently been using it to float purchases of stock while my sale of some mutual funds clear. So I had a bunch of questions, like “What’s buying power?” and “How much do I need to keep in my brokerage account?” Well, I was once again helped by a terrific tutorial on Margin Trading at Investopedia which answered most of my questions.

I hope you’ll head over there and read it, but let me address some potential questions for you here in case you don’t have time to check it out. (I’ll assume for brevity that you understand what margin trading is)

Buying Power is the amount of money you can currently use to purchase marginable securities. It can be simply calculated as

(Cash + Security Collateral) * 2 – Marginable Securities
— or in many cases —
Cash * 2 + Security Collateral

Security Collateral is basically any marginable security such as stocks and mutual funds. Note that it appears that Buying Power is based on the value of your security collateral before the trading day begins.

Margin is like an Overdraft Account on your checking account — at least at TD Ameritrade and according to the Investopedia article. You can’t say “I want that one stock on margin” unless you only have one security in your account. Otherwise, you can just keep buying any security until your Buying Power reaches $0.

Maintenance Margin is Cumulative. When you have a margin account there is a minimum value that you must maintain at all times. This is called the Maintenance Margin. It’s calculated by adding up all the maintenance requirements for each security in your portfolio and if your account drops below the minimum value, then you’ll have to add more cash or securities to your account.

Maintenance requirements on individual securities can change based on price or volitility and can vary from broker to broker, so it’s best to check the rules on maintenance requirements on your account.

Prosper.com: A 6-month Review

After launching in February as the first person-to-person lending site in the US, Prosper.com has seen a good deal of activity. Now that it’s been 6 months since they opened their doors, I used Google Blogsearch to see what people’s experiences were out there in the blogosphere.

I discovered that there were some very valid criticisms of Prosper. For example, the risk and time to manage these loans may not be worth the effort. Plus to further exacerbate the problem, uninformed lenders are setting lending rates at risk/return levels no intelligent investor would touch. It can also sometimes be difficult to find loans for borrowers in states that set rate limits.

Despite these valid criticisms though, I found mostly positive reviews. Since loans on Prosper are amortized over 3 years, it will take some time to see the full impact of the site on the internet community, but looking 6 months out, things seem to be pretty positive. Here are the most interesting discussions I’ve found online:

Good Feedback

Criticisms

Strategy

How Prosper Works
Prosper.com is the United States’ first person-to-person lending system. It matches individual borrowers with individual lenders, and allows lenders to receive better interest than they could in the bank, while allowing borrowers to face lower rates than loan providers. Proper.com claims to be highly secure, and provides collections services if the borrower defaults on their loans.

Each borrower is given a credit rating based on their Experian credit report, which lenders use to determine how much they would be willing to loan money. Lenders offer to fund part or all of a borrowers loan, and the loans with the lowest rates that meet the borrower’s target loan amount will be packaged by Prosper and transferred to the borrowers account.

Frank the Financially Savvy Atheist provides a good summary of the risks involved with lending money on Prosper, and you can also check out the lender tutorial and borrower tutorial on Prosper.com.

As a side note, U.K.-based Zopa will soon be launching in the U.S. and offers a similar model.

Prime Interest Rate & Credit Interest Spreads

Almost all of us hear some variation of this from our credit card or car loan company: your interest rate is a variable rate of 14.99% based on Prime plus 6.74%. That means your current rate is 14.99% but may change at any time, so if the prime interest rate goes up or down 0.5% so will your card. Let’s look at the Prime rate closer, and I’ll share some tips to enhance your credit search.

The Prime Interest Rate, also known as the Wall Street Journal Prime Rate, is based on a survey of lenders by the WSJ. This is the rate that lenders offer to their most premium borrowers. The additional interest that your lender tacks on your loan, called the spread or margin, will decrease as your creditworthiness increases.

Better Credit; Lower Spread. Many of us start out with credit cards in college with rates running into the high teens or low twenties — analogous to a 10-12% spread. However, as you get older and build your credit, your spread will decrease. For example, I recently received an unsecured line of credit from CitiBank with a spread of 0.99%. The idea being that as your creditworthiness increases, your risk decreases, so a lower interest rate is required.

Comparison Shopping: Apples to Apples. It’s more important to find a low spread than it is to find a low interest rate. Because prime can change frequently, look for the spread on that credit card you’ve been eyeing. If you found a card with an 11.99% interest rate two months ago, and you just found another card with an 11.99% interest rate today, the new card may be more costly if interest rates fell 0.50% within the last two months. Always be sure to compare apples to apples by comparing the spread.

About Fed Rates

Just like credit card rates are based on the Prime Rate, the Prime Rate is based on the Fed Discount Rate and Fed Funds Rate.

  • The Fed Discount Rate is what the Federal Reserve loans money to banks at.
  • The Fed Funds Rate is based on the Fed Discount Rate and is the Fed’s target of what they would like banks to loan money to each other at.

Because banks and credit card companies borrow money at these rates to provide loans and credit to their customers, some if not all of the cost is passed on to the consumer through the Prime Rate. So when you hear that the Fed is raising or lowering interest rates, look for a change in your Prime Rate coming to a statement near you.

Finding Rates
You can find all the current Prime and Fed rates at BankRate.

Resources
The Federal Reserve: Monetary Policy. Investopedia.
Credit Card Management: Basics of Card Rates. AOL Money & Finance.

Tips for using Bid-Ask Spreads

I recently have been looking at the Bid-Ask Spread (sometimes called the Bid-Offer Spread) to help me determine the right time to add to my positions. Here are some tips I’ve picked up that you might find useful when looking at your stock’s spread.

1. Understand the Numbers
There are four pieces of information that make up the spread info. Find them, know them, love them:

  • The Bid Price. This is the amount you will pay to buy the stock right now.
  • The Ask or Offer Price. This is the amount you will receive to sell the stock right now.
  • Bid x Ask Shares. This is the number of shares requested for purchase versus the number of shares available for sale.
  • Volume. The number of shares traded from the beginning of the session to the time of the quote.

2. Check the number of bidding and asking shares.
If you see something like 5.0 x 3.0 for the bid x ask shares, there could be a potential rally as the number of shares requested for sale is exceeding the number of shares available to purchase. This constrained supply may increase the share price.

Conversely, if the bid x ask shares are showing up as 2.0 x 4.0, there are more shares available to purchase than there are to buyers. This surplus in supply could lead to falling prices.

3. On the NYSE, Check it Real-time.
The NYSE bans the publication of bid-ask spreads on delayed quoting services, so if you want to see what the spread is, log in to your brokerage account and get a real-time quote.

Wrapping it Up
The bid-ask spread is important for those who are looking to maximizing their returns by timing their entries, and also can provide useful indicators when a stock is about to turn around. I encourage you to read over the excellent articles below to better understand how the spread works.

Resources
Trading – Bid, Offer and Spread. by Chris Lott. The Investor FAQ.
Why the Bid-Ask Spread is so Important. Investopedia.
What are the determinants of a stock’s bid-ask spread? Investopedia.

Introducing digg to InvestorGeeks

A digg box on every interesting article Digg, the extremely popular article voting site, is now part of InvestorGeeks! We’ve recently installed a new feature that will allow you to digg your favorite IG articles right from our site. New articles that we feel are digg-worthy will have the familiar digg box in the upper left corner.

If you’re not currenly a member, simply click the link and you will taken to the registration page where you can setup your account. If you’re already a member, simply log in and record your vote!

What is digg?
Digg allows netizens to vote on content they think is the most interesting. By “digg-ing” an article, you’re giving a vote that gets tallied up with all the other votes on the site. The fastest growing and most highly voted articles will get coveted space on the section page for the world to see.

We’ve been dugg once so far, and it has sents thousands of valuable visitors to the site. By adding digg to every article, we’re hoping you’ll help us gain more exposure for your favorite articles.

Digg has recently added more sections to their site, including a Business & Finance section. Have a look at it, and take a look at some of the other great content on the web as voted by your fellow surfers.

InvestorGeeks on digg:
Chris Welch is “guppywon
Jason Coleman is “ideadude
Frank Sanders is “fwsanders

8 Rules to Successful Partnerships

We’re starting a new category on InvestorGeeks called “Entrepreneurship” because we believe that every investor is an entrepreneur at heart. Investing is the process of making money through the active trading and investing in appreciating assets, and this process of building assets is what a successful business is all about.

There is a chronic personality flaw that I see in so many entrepreneurs, that unnecessarily impedes their true success — resistance to having partners. I’ve had partners in the past, and I know the difficulties that can be faced by having a partner that is not picking up their fair share. But the secret to success in business is not to exclude people! Having partners is essential when you want to elevate your wealth.

I know the stories: you get a partner, everything is great for a while and then the other person slacks off, and you end up carrying almost all the work and still are forced to split the trappings 50/50. Or my other favorite: you get a partner and everything works out great for while. You’re both motivated and smart, and you share the work equally — but you both want to be in control.

You both have some hang-up on attaining this mystical position of power called “CEO”, and the balance of power becomes disrupted. As soon as there’s some kind disagreement about the future of the operation, one of you storms off swearing to never work with the other again, and the relationship dissolves.

These are some of the unfortunate realities in the life of the entrepreneurs, but I’m sorry to say I believe they are necessary evils for people who are just starting out. When there are no personal assets to build a company from the ground up, we have to be willing to give up some control to build collaboration with others, even at the risk of something going wrong.

Even if you’re not crazy about the idea of having partners, and there are many of you, I don’t imagine it to be required your entire life — just to get off the ground. When stuck in the rat race, few of us can escape quickly without the efforts of many.

Here are some rules I live by when building a partnership:

  1. Try to find two or three other like minded people; I find teams of 3 work best.
  2. Be willing to give new partners the benefit of the doubt, especially if don’t know them yet.
  3. Encourage communication and run all your important ideas by them.
  4. Be self-directed and take independent action day-to-day for the benefit of the project; expect the same from your partners.
  5. Be open and honest about how you feel — but do it constructively and for the benefit of the team.
  6. Try to keep the balance of power equal at all times. Ensure no one abuses their power.
  7. If you feel the balance of power is shifting either someone is taking too much or someone is participating too little, act quickly and assertively to resolve the problem.
  8. When it’s time to dissolve the partnership make sure you have everyone’s, not just your own, best interest at heart.

“But,” you may be asking, “why do I need partners? I can do everything myself!” I will not argue that point with you, since I used to find myself in that similar frame of mind, but the problem is that when you’re stuck in the rat race, or are very strapped by cash, time becomes a key concern. Either you have to work part-time to build your operation, or you have to quit and work rapidly to build critical mass, which is very labor intensive. You may be smart enough to handle every facet of the operation, but to put it mildly you simply do not have the time and sorry to say, there’s lot of equally smart people besides you! Don’t you want them to play on your team?

Let me share another secret with you; a lesson often ignored by many techies. There is often an economy of scale in brainpower when you get 2-4 people together to look at a problem. 2-4 people can figure out a problem a hell of a lot quicker and better than one. You each motivate yourself to think more clearly about your ideas, and you can rapidly bounce ideas off each other. To bridge the analogy, with partners you may be able to grow faster than by each of you individually.

If you have had problems with partners in the past, poor communication may have been to blame. Communication is absolutely critical to successful partnering. You must be willing to let down your guard and have both persons’ best interest in mind. Tell the others what you’re thinking, and be receptive to the thoughts of the other person. You are a team, and although compromise is sometimes necessary to get something accomplished, the benefits far outweigh the perceived cost.

I hope you’ll take a moment in your life now to think about where you’d like to go, and invite the smart, talented people whom you know to help you get to your goal, while offering to help them get to theirs. I’ve had good and bad experiences with partners, but making money in this world is to a large degree affected by our ability to deal with others — and in order to achieve your goals, having a partner can make all the difference.

Hunting for Tenbaggers; Catching AERT

Ah, the tenbagger. That mythical creature from stock trading lore that grows 10 times in price. This is what dreams are made of. I like a quote from Jason Kelly’s book, The Neatest Little Guide to Stock Market Investing. “It takes only $10,000 and two tenbaggers to become a millionaire.” It’s simple in concept really. Find a fast growing company, hold on to it for 5 or 6 years, and sell it for a long-term windfall. The equivalent of 50-60% annually. It’s every investor-boy’s fantasy but mysteriously elusive. In fact there may only be a few stocks a year that turn out to be tenbaggers. So the question is how do you find them? Maybe I can help, but first a quiz…

Question: What is the name of a stock that grows the equivalent of two tenbaggers?
Answer: A hundredbagger.
Question: Is it possible to find such as stock?
Answer: Yes! Since Monday 7/8/2003, exactly 3 years ago today when Hansen Natural (HANS) began its meteoric rise, the stock has appreciated 9,457% in price. In other words, $10,000 invested 3 years ago would be worth $946,000 today.

Finding these top performing stocks before they leap is possible and has been responsible for the achievements of great investors like Jim Cramer, Peter Lynch and Warren Buffett. So where do we begin? I don’t believe there’s a science to it — as with stock investing it seems more art than science, but I’d like to share this story with you of my recent experience to serve as an illustration of how these tenbaggers may reveal themselves.

The Seed
I use stock screeners in my research to help me find companies that meet certain criteria. It’s useful for me to be able to learn about a statistic and then find companies that meet target values. For example, I may search for companies with 5-year earnings growth exceeding 10% and Market Caps less than $100 million.

One of the screeners I use frequently is based on Phil Town’s book, Rule #1 (review). I find the results of this screener are a great list of sound companies at various stages of their growth. However, I’ve also read William O’Neils book, How To Make Money In Stocks, which provides alternative criteria for stock selection. So I thought it might be interesting to merge the two screens together to see what comes up.

What I found, to my surprise, was a list of all-star companies that have been making headlines because of their excellent price performance. Some of the names on the list include Hansen Natural (HANS), Cognizant (CTSH), and Eagle Materials (EXP). But alas, there were no riches in these results because these famed companies had already achieved tenbagger++ status. So I thought, “How can I find them before they jump?”

The Screen
After analyzing the stocks a bit, I realized that the best performers had a period of relatively flat price performance followed by 3 or 4 years of rapid, steady appreciation. In fact their prices doubled once at least once every year during their ascent. If I could come up with a screener that could find companies with relatively flat prices that just recently started growing every year, then I may be able to spot these excellent companies while they still had plenty of room to grow.

I put together a screen that searches for companies with valuations between $50 million and $1 billion who have doubled in the last year but have grown less than 10x in the last 5 years. With these criteria, I’m hoping to find strong growers that haven’t peaked yet. I prefer to use Microsoft’s Deluxe Stock Screener because it can search on the last 5 years of earnings data and you can also perform simple algebra on the various search fields; something unusual for free screeners. Here’s what my screen looked like:

  • Market Capitalization < = 1,000,000,000
  • Market Capitalization >= 50,000,000
  • Industry Name (Display Only)
  • Last Price/5-year Low Price < = 10
  • Last Price/52-week Low >= 2

It returned 147 results. I then sorted by industry and looked for companies I knew and industries I think have big potential. Honestly, most of the companies didn’t have nice charts like Hansen or Cognizant, and many of the industries like home building would probably grow quickly in the near future.

Finally I found one promising company, Advanced Environmental Recycling Technologies, Inc. (NASDAQ:AERT) which is in the composite lumber industry. My dad is a builder and complains about the cost of real wood lumber, and composite wood is now being used extensively to build decks and exterior trim. Although traditionally more expensive than wood, it offers homeowners lower maintenance and with lumber prices rising, the price differences have been narrowing.

One of the best pieces of advice I ever read was to “buy what you know.” If you know something about an industry because you use their products or services, you already have an edge on other investors.

The Research
When finding a stock you have to do research especially when you’re making speculative plays with small-cap companies. These companies are inherently volatile so you have to know the company inside and out before you make a move. AERT’s chart looked pretty good, demonstrating that same flat price movement followed by annual doublings of the other stellar stocks, and I really liked the company’s fundamentals.

Here’s a company steadily growing revenues over 30% a year, but has a low multiple of 13. There are no analysts covering it so it’s not even on the radar yet for the big guys yet, but once the company valuates at over $100 million more people have to start taking notice eventually, right?

I then called my Dad, a builder and real estate investor, to get his take. He gave me names of competitors whom I researched and I also listened to AERT’s most recent conference call on Yahoo. It looked like this company was one of, if not the best, run businesses in the industry and also has an exclusive deal with Lowe’s to sell its ChoiceDek products. What a deal!

I also have heard that when real estate prices soften, people tend to spend more on their homes, and since my father told me contractors are using composite lumber extensively for decks and exterior trim, two of AERT’s biggest products, it looks like sales may even get a shot in the arm.

Everything I saw convinced me that there was a good chance this stock was a real power-play. I decided to take the plunge and buy the stock. Now time will tell if I’m right.

Wrapping it up
Finding tenbaggers is not easy. It takes an insight into an industry or company that few else have, and an eye that spots it before most others do. With smarter thinking and an open mind, you can do it. Is AERT a tenbagger? I won’t know until it becomes one, but I certainly hope so. If nothing else, though I did find a growing company, with good fundamentals, that I’m sure will make me money, and that’s all I care about.

TD Ameritrade Has Most Mutual Funds Available

I was recently disappointed because I couldn’t purchase the Mairs & Power Growth Fund (MPGFX) or Artisan International Fund (ARTIX) through my T. Rowe Price Roth IRA. After doing some sleuthing on Morningstar I discovered I could purchase both of these funds through TD Ameritrade, from whom I have a standard brokerage account.

I was ready to transfer all my assets over from TRP to TD Ameritrade and it turned out that transferring a Roth IRA was extremely bothersome. So instead of jumping into anything I thought I had better check to see if there was another discount broker that offered more funds, because I didn’t want to have to do this again. I spent some time at it, and put together a screen using the Morningstar Premium Fund Screener (more info) that would show the number of funds each major discount broker had available, and which funds were covered by all of them. The results were fascinating.

As it turns out, my beloved T. Rowe Price, with its excellent service and $35 commissions offered the least funds to be purchased, and TD Ameritrade, my favorite discount broker offered the most with roughly 10 times the number T. Rowe Price offered. Here are the results of my screen:

Broker # of Funds
TD Ameritrade 14610
Fidelity 11341
Scottrade 10582
E*Trade 8738
Schwab 2828
Vanguard 1760
T. Rowe Price 1491
Available from all 227

*NOTE: Unfortunately, I wasn’t able to find Sharebuilder in the list of brokers on Morningstar.

I was surprised to see that so few funds were offered by all the big companies, suggesting that maybe it’s not a terrible idea to have funds from the top 3. In fact, if you had accounts from TD Ameritrade, Fidelity and Scottrade you’d have access to 15,700 funds. Now I’m not suggesting that you go ahead and open these accounts immediately. More accounts mean more hassles, and I would wait until there was a fund I couldn’t purchase before opening another account.

There doesn’t appear to be any adverse affects to owning multiple Roth IRA accounts, other than additional administration time on your part. The IRS treats all your Roth IRA accounts as one large account, and opening an additional account shouldn’t reset your 5-year holding clock. Motley Fool has an interesting article about multiple Roth accounts, which you should read if you’re thinking about opening another account. As always speak to a qualified professional (i.e. not me) before making any changes to your account, and I’ll keep you posted if anything happens with my move over to TD Ameritrade.

New Authors Coming Soon!

I just wanted to thank everyone who submitted applications to become an InvestorGeek last week. We’ve had some great candidates apply and we’re looking forward to great new members! We’ve been reviewing the applications and will be contacting contributers as we decide on them.

In the meantime look for new content from us all this week, and we thank you for your patience!