Some InvestorGeeks (and other) Updates

1. We have a new author! His name is Alex, and he’s already published a great article on alternative energy that is getting some attention in the comments. View the great discussion over there.

2. People are signing up for the mailing list. Good. I still have no idea what we’ll do with it. In the meantime, you can win a chance to get some free books and know that we won’t be giving away your email address or selling it to spammers, etc. Please sign up. I want to keep in touch with y’all.

3. Speaking of keeping in touch, we’re thinking of ways to bring the forums back. We may hire someone to spam protect the old forums or move to a thirdparty solution. If you have suggestions, speak up in the comments.

4. Also, we’re considering updating the blog design and layout. It’s something we’ve dreamed about for a while. We even have a v2 that is 80% complete, although totally outdated. We’d start from scratch to build a better site that will help you navigate all the good content we’ve built up over the years.

5. I AM the real Jason Coleman. This guy is the Fake Steve Jobs.

6. Ugly got a job and I miss his Investing posts at UglyChart.com. He has been posting links more often, and even just linked to DateSpaces. He’s supposed to start "position trading" November 1st.

7. DateSpaces.com is a site that could work. It’s a location search engine with a focus on dating. If you live in New York City, check it out. If not, complain and get them to expand to your city.

Retreat!

Just a quick note to say I think the market has had its major top.

I am going to wait for a pullback tomorrow (Wednesday 25th July) and have an open order to go short SDS at $51. Hopefully this will get filled in the next day or two.

My reasons for going short via SDS are two fold. Firstly, I am happy with my current gains and wish to lock them in. At this level, rather than sell positions and incur the taxable gains, I can retain them and go short via one ETF. Secondly, SDS gives me exposure to twice the movement of the S&P500. The S&P500 is the weakest of the major indexes currently and is well off its high of 1555. I would hate to be in this ETF when the market is moving up (just take a look at a 1 year chart!), but in corrections or where you want to hedge against a fall, this ETF is perfect.

I have suggested previously that investors raise cash, which I have now done, and prepare for a correction. In buying SDS, I hope to ensure I receive some protection for the stocks I have retained.

Good luck,

Philip John

This post is for entertainment purposes only. No part of this post should be construed to constitute investment advice. The author is not an investment professional and assumes no responsibility for any investment activities you undertake. Prior to undertaking any financial decisions, you should contact an investment professional.

Jim Cramer on Hedge Funds Manipulating the Market

Some good stuff from an interview with Jim Cramer here on YouTube.

I think we have a few months left on our TheStreet.com subscription. I might check out their TV offerings a bit more. I hear that WallStrip is over there now too.

Cap Rates

What is a cap rate? A cap rate (or capitalization rate) is the net operating income divided by the price of a property. If you have a $100,000 property and its net operating income is $10,000 the cap rate for this property is 10%.

What does this mean to you? How have cap rates affected the current real estate boom?

If you pay cash for this property, your cash on cash return will be 10%. How does this tie in with interest rates? Simple math will tell you that if you can borrow money at 9% and buy property with a 10% cap that you have a 1% spread. The maximum return that you can get from a situation like this is infinite. The less you put down, the greater your return is (red line).

What if interest rates were at 10% and your cap rate was 10%? Well, then your return on this property will be 10% no matter how much you put down (blue line).

And what if interest rates are greater than cap rates? Well you will have a negative return until you put enough down to break even. If interest rates were at 11% and your cap rate was 10%, it would be around 10% down or $10,000 (green line). What’s interesting to note is that your return will never go above 10% no matter how much you put down.

Cap Rates Chart

Now you can see why there was a real estate boom in the past 5-6 years. Interest rates were below cap rates and investors could borrow as much as they wanted. In fact, the more they borrowed, the better their return. As more people jumped on the real estate bandwagon, prices went up and cap rates came down. Eventually the cap rates became lower than interest rates. From the chart, you can see that your cash on cash return is limited to the property’s cap rate if your interest rate is above it. So why were people still buying? The answer is potential appreciation. With real estate prices rising so fast, people were ignoring the fact the fundamentals did not make sense. They were content with a 3% cap rate and negative cashflow because of the appreciation potential.

And that was all fine and dandy until about 8 months ago. The appreciation train derailed and now they are stuck with these 3% cap properties and 9% investor loans. In times of no appreciation, we must stick to the fundamentals.

Intro to Real Estate Investing

Real estate investors have become a cliché during the past 3-4 years. It seems like everyone you talk to is a real estate investor or knows someone who is. What makes real estate investing so popular? In the past few years you could do no wrong with real estate. With profits in the five and six figure ranges, one profitable real estate deal would exceed most people’s yearly pay.

On Risk and Effort
However with great reward comes great risk. That risk can be mitigated and controlled if you are investing correctly. Unlike paper assets, buying real estate is not a simple process. You cannot just log into your brokerage account and point and click. It also requires additional work, sweat equity or even more money.

How You Make Money
You make money in two ways, cashflow or capital gains. This is the same as buying high yield stocks or buy low and sell high. When it comes down to the math, real estate investing is pretty easy.

For cashflow, buy property in which the rent will cover all your monthly expenses (mortgage, taxes, insurance, management, HOA, maintenance and repairs). For capital gains, buy low enough to resell at a price that covers all your expenses (holding costs, realtor commissions, closing costs and repairs). Purchased correctly you can get both cashflow and capital gains with your investment property.

What I’ve Learned from InvestorGeeks Applicants

I learned a lot reading the applications our new InvestorGeek hopefuls have been sending in. For example…
My perspective on investing will change when I hit my 30s:

While I don’t think that saving is bad, I just think that there are better ways to get to your financial goals. And with all the members on these blogs being under 30, they have time to take a risk or make a mistake. Time is on their side.

I’m not the only one who has thought about how to invest with my (soon to be) spouse:

I tried for years to get my significant other on board. You would think securing our financial future would be a priority. But people are different. We are wired different, raised different, and sometimes we find to our dismay that we want different things in life.

Buying stocks is a lot like going to the grocery store:

Standing in front of the orange juice section, cooling my heels literally, I see a 128oz jug of Minute Maid Orange Juice for $5 (actually $4.99 but lets make it simple). I also see a 64 oz carton for $3. The hubby drinks a lot of orange juice (extra, extra pulp – he’d be happier with full rind) so I, of course, want to get the best deal.

What do I do?

While dollar cost averaging is usually a bad idea, dollar cost saving is smart:

I read in a book today how Dollar Cost Averaging is the best way to invest. I’ve read this many times and all I have to say about that is what a stupid pile of horse shit advice that is. That is the dumbest strategy, short of buy and hope, that there is. Let me explain how dollar cost averaging works to screw yourself and then I’ll give you a GOOD strategy that makes a billion times more sense.

Oil is not invulnerable to supply or demand:

What we have are market forces in action. Oil will have an extremely hard time reaching 100 USD because those countries that burn the most will start cutting back making more oil available for those countries that are growing.

Universities are a good investment for themselves as well as their graduates:

The Yale Endowment is one of the most successful long-term investors. Last year (2005) their return was over 22%. And they have a long-term 20 year track record of over 16% in annual returns. They achieved these remarkable returns by careful asset allocation strategies.

Keep Tabs on All Our Investor Geeks

I’ve thrown together a few tools you guys can use to keep tabs on us. Subscribing to the InvestorGeeks feed is the first way, but we also do a lot of writing outside of the site.

At Rollyo.com, you can use our custom-configured InvestorGeeks_Authors search engine which will search through a list of all the investing and personal finance blogs our authors maintain. This is a great way to get the InvestorGeeks take on MSFT or find articles by InvestorGeeks authors on 401ks.

The next tool comes courtesy of FeedJumbler.com. Once again I’ve compiled a list of all of the blogs maintained by InvestorGeeks authors (this time including non-investing related blogs) so you can keep tabs on our every move. You can subscribe to the feed using your favorite feedreader by visiting the InvestorGeeks Combined Feed.

Business News from Around the Web

From time to time I find things on the web that pique my interest. And from time to time I’ll share those items with you. So here goes.

NPR has some Financial Advice for Twenty-Somethings.

The Baltimore Sun has an article describing what those with interest-only loans set to reset in the coming year (up to half a trillion dollars worth) can expect.

Wired is running an article examining what’s been going wrong at Sony.

CNNMoney has some advice on some investment choices you may want to avoid and what to be wary of as you plan for retirement.

Finally BusinessWeek a piece up that is sure to agitate some of the youngsters among us.

My Memorable Failure

Sherman, set the wayback machine to the winter of 1999! This was a time when everyone thought they were a financial genius. You couldn’t loose, or so we thought. I was a conservative investor even in those days but a co-worker was talking about a great investment tip he heard from a friend who had heard it from their doctor. That in it self should have been a sign.

My co-worker had heard about a company called Socket (SCKT) and while he wasn’t sure what they did, he was certain that they would do it well and their stock would skyrocket. I looked into the company and I must admit I was not impressed with their financials. They had been in the red for a long time but they did make a needed product. The stock was trading very low at around $1.29 so I bought in.

My co-worker’s friend’s doctor had been correct and the price soon started to rise. It kept going up and I was amazed. I went into work one day and asked for the latest news. I was told it would easily hit $50 so I put in an order to sell at $50.

It never made that mark; it stopped at around $49.50. Can you believe it? It would never see those heights again. Everyday my wife would tell me to sell, everyday I clung to a hope that it would go back up. One day my co-worker said the doctor was putting another $10,000 in because he heard it was going to go to $200. In a couple of days I sold at around $18 and I was so mad. I kept thinking about how I lost almost $3200 and how it had gotten so close to the magic number.

Lessons learned; there are many but here are a few for every investor.

  • If you ask a group of random people to pick a number between 1 and 100 they will almost always pick a whole number. That’s being human, it is the way we think but it is not the way the market works. When you decide to sell, sell.
  • The only two numbers that count are the price you paid and the price at which you sell, everything else is imaginary.
  • Finally, do your homework; a company that is in the red is a questionable investment. I am still working on this one and maybe I haven’t learned my lesson as I now hold a good bit of Fiat (fia) but I am thinking they can pull it off.

I wanted to write this short piece to share my mistakes and encourage others to share theirs; something very few people like to do. Hopefully we can set pride aside and learn from our failings. One last note; SCKT can still be bought today for about the same amount of pocket-change I paid almost 7 years ago. Maybe some day it will be worth $50 a share. I can only hope.

Understanding Market Orders: Three Resources

If you’re anything like me then you think that once you click on the appropriate button, or get off the phone with your stock broker, your order speeds off to be filled at whatever price the stock is currently trading at. How wrong I was.

After placing an order to buy a stock recently, I was shocked to discover that my order did not speed off and was not filled nearly instantaneously despite my broker’s “5 second execution guarantee”. This perplexed, befuddled, and scared me to be quite honest. I had placed the order anticipating that the order would be filled almost right away, and had assumed that the order would be filled at a certain price. “What if the stock price jumps?”, I thought. I’d be paying more than I wanted to for this stock. Rather than risk it, I canceled the order before it could be filled. (I won’t even comment on whether I should have been buying a stock that I was so ready to give up on, based on the fact that the stock had actually gone up in price.)

So why didn’t my order go through right away as I expected it too? After all it was a no-fuss no-muss market order. Just buy it at the stock’s current price no worries about the bid-ask spread or anything like that. Right?

Not so much. Turns out that the bid and ask spread *do* effect market orders (in many ways) and that a stock purchase goes through a number of steps and can take any number of paths before you actually own the stock you set out to buy.

For an in-depth explanation from someone who actually knows what they’re talking about Take a look at these Investopedia articles: