How Do Your Investments Stack Up Against Schiller

Posted on April 19, 2007 by Nirav

If any of you remember Robert Schiller, of Irrational Exuberance fame, he thought tech stocks were overvalued and now he thinks real estate is over valued too.

According to an interview, he stated that between 1890 and 1990 the after-inflation return for real estate was ZERO!

This is not really surprising because real estate has to be affordable in the long run otherwise people are priced out. Since 70% of the population owns a home as opposed to being homeless, in the long run, homes have to have stayed affordable! Right now places like California seem unaffordable and they will correct until they are. (They’ll probably over-correct until they’re insanely cheap too).

So what is Schiller investing in right now?

I’m probably a little over 60 percent in stocks, almost all of it outside the U.S. I have a lot of cash. And I’ve been reducing my exposure to real estate. It may be at the end of a cycle.

Most of my stocks are outside the US too. My 401k has 60% of it invested in foreign stocks. The rest is divided over mid-cap & large growth and value funds.

In my brokerage account, the mix is a little different. According to TDAmeritrade’s Instant XRay tool (which shows you what your portfolio would look like if it were a mutual fund), my asset allocation is

High Yield – 7.33%
Hard Assets – 61.11%
Slow Growth – 12.83%
Classic Growth – 17.63%
Aggressive Growth – 0.58
Speculative Growth – 0.51

Of course I have a smaller more speculative account at Interactive brokers too which comprises mainly of a Japanese REIT (which I bought on the Tokyo Stock Exchange), an Argentinian REIT, and a bunch of speculative long calls and short puts.

Foreign Stocks – 70%
Speculative Growth – 30%

How does your portfolio stack up?

Are Stocks A Better Investment Than Real Estate?

Posted on April 19, 2007 by Nirav

According to this article in Money Magazine, stocks are a better investment, based on a study taking in account the years 1978 to 2004.

While there are some valid points favoring stocks over real estate, I think it was a one sided arguement.

Why choose a period where the stock market did very favorably? According to Gary Burtless, the real return on stocks since 1885 using a 15 year trailing return is only 6.3%.

I would assume real estate to keep pace with inflation or around 3-5% per year over the same time period. So on the surface, stocks do seem superior to real estate.

However there are certain benefits to investing in real estate that have to be considered.

1. Leverage
You can get in with only 10% down, sometimes even less. In stocks, the best you can do is 50% down. The higher the leverage, the more you make if you’re right. (The converse is also true!)

2. Tax Savings
You can defer paying taxes on the profits indefinitely using 1031 exchanges. Not only that, you can use phantom depreciation losses to deduct upto $25,000 from your regular income. With stocks,
you can deduct actual losses but only upto $3,000 of regular income.

3. Ease of Understanding
While investing in real estate is more difficult per se than stocks, this is an advantage. It helps keep the novice investors out, and keeps prices inline with valuations (well except in the recent past where everyone become an investor!).

With so much money chasing stocks in 2000 and so many execs lying about company performance, tech stock prices saw incredible appreciation. Many of them tanked 90-100%.

A 90% drop in real estate prices is difficult to imagine. Not only that, you always know if a property is fairly valued or not.

If the rent doesn’t cover your holding costs even after you put down 25%, you’ve probably overpaid for it. Thats a very simple rule of thumb! Unlike in the stock market, you can’t hide behind fancy accounting in rental property!

Conclusion:
Listening to the popular press will usually never help you in the long run. However, I think it boils down to investing in what you know. There are people who’ve made incredible amounts of money in the stock market. But I think these people make money in all asset classes without playing favorites.

For example, Warren Buffett has invested in foreign currencies, commodities and even a manufactured home-builder (and along with it real estate) apart from his stocks.

I also know a few people who make money day trading for a living. Even these people invest their excess profits in real estate! If you can trade stocks, you can definitely understand real estate calculations.

For most people who know nothing about investing and don’t want to know, investing in stocks is the easiest way to invest. It may not be the best but its the easiest and most likely the only way they’ll ever invest at all.

But I don’t think the two classes are mutually exclusive. I’ve made incredible amounts of money in real estate, which wouldn’t have been possible with the stock market. But now, I’m moving some of my profits in stocks and commodities because I think the easy money in real estate is gone.

I think you should invest in anything that makes sense. Don’t get married to any stock, properties or any particular asset class. There’s a season for all investments!

Here’s a good post on looking for investment ideas and the basics of investing in real estate

Vonage is Screwed

Posted on April 6, 2007 by Nirav

Vonage has lost a case against Verizon over patent infringement. In a ruling today, its no longer able to market it services to new customers.

According to Vonage’s lawyer, the ruling comes as ‘a bullet to the head’! Vonage’s stock (ticker: VG) closed at $3.38 on thursday. The markets were closed today, but I expect them to sink like an old router on Monday!

Surprizingly the CEO, Jeff Citron, who was fined $22 million by the SEC and banned from trading securities when he ran Datek for scapling retail investors, hasn’t sold any of his 42 million shares.

Maybe he knows something we don’t?

When The Market Crashes

Posted on March 5, 2007 by Nirav

Now that the market dropped like a sack of potatoes, Cramer has some good advice. (Of course hindsight is 20-20, but still its good advice!)

You only have a couple of protections from the whims of a broken system:

1. A company that pays you a dividend that is equal to or better than Treasuries after taxes is a good defense.
2. Or you want a stock that has a valuation so low that you know it’s a bargain — and its management knows it’s a bargain (read: it’s buying back stock right here).
3. Last chance: a company that is so defensive in nature that even if there’s a worldwide slowdown, it will meet expectations regardless: Coke (KO), Pepsi (PEP), Altria (MO), Kellogg (K), General Mills (GIS), Clorox (CLX) and Colgate (CL).

If you don’t anything that fits one of those three criteria (I’d rather have two or three per company) you will not be OK for now. That’s because we are now going to have people who just say, “Wow this is too crazy, let me out of here!”

But nobody ever made a dime panicking. This time will be no different, but only if you are shrewd about what won’t hurt you and what can work in a volatile and down environment.

In India, stocks like Colgate, Johnson & Johnson, Proctor & Gamble and Unilever are called blue-chip stocks that never go out of business because they make stuff everyone needs and uses. Maybe I should stop looking at their prices everyday and finally buy some!

A 50% Dividend ?

Posted on March 2, 2007 by Nirav

I recently bought a stock called Health Management Associates (HMA) when they announced that they would be paying out a special $10 dividend. Since the stock was trading at $19 and change, I thought that would make a neat dividend.

The stock goes ex-dividend tomorrow (well its past midnight so its actually today) and I wonder how much the stock will drop. Will it drop by $10? Maybe less or more?

There were some fluctuations in price this week but its still around $20 which I take is a good sign.

Another issue is the tax consequences. Will it be taxed as a return of principle or as a dividend?

BHP Billington Share Buy Back

Posted on February 28, 2007 by Nirav

BHP bought 1.5 million shares today. They report this on their website. Pretty amazing how much stock they’ve bought back. The stock buy backs along with their regular dividends and diversified commodity base makes them one of my favorite stocks. Plus the fact that everyone I know isn’t harping on about them (like Qualcomm in 1999) makes it even more attractive.

Along with Anglo American (AAUK), these two are great commodity plays. Plus they’re both down over 5% this week makes it a good time to jump in. I plan on holding both for a long long time.

As usual, do your own Due Diligence. If you don’t know what that means or how to do it, put your money in ING Direct instead!

Today’s market rebound was disheartening. Even though my portfolio is down on the whole, my invesrse S&P500 fund was up 7% yesterday. Now I don’t know whether I should hold it or bail. On the other hand, if we saw another day like yesterday, I could exit and take my profits! But then gain, everyone else seems to be really happy with the rebound. I guess thats the closest we’ll ever get to world peace. I’ll take it 😉

Biggest Market Drop Since 9/11

Posted on February 27, 2007 by Nirav

The stock market suffered the biggest loss today since the terrorist attacks on September 11th 2001.

They were allegedly caused by profit taking in China caused by the governments comments on cracking down on the rampant stock speculation taking place and by Greenspan’s comments on the US facing a mild recession later this year. Even Oil and Gold were down today. So was every other sector!

The only green mark in portfolio was URPIX which was up 7% today, but I didn’t own enough to offset my losses. Still, the losses are to be expected and a 30% cushion still isn’t bad. Hopefully WCI will drop even further and I can actually profit from my remaining puts (which are currently underwater)

I did use the drop in GDX (gold mining ETF) to sell some March puts. If they expire worthless, then I’ll have made some money and if they don’t I’ll own some GDX shares for less than what I sold them during the last options expiration period.

Wonder how long and severe this correction will last?

Shorting the S&P 500 index

Posted on February 17, 2007 by Nirav

Looking at the unbelievable Valentine’s Day rally in the stock market, I decided the market might be heading for a correction. I read somewhere that smart money had the highest amount of short futures contracts since May of last year, when the market corrected quite a bit.

The easiest and cheapest way to short the S&P 500 is to buy a Profunds Inverse Market Fund like URPIX. It has amongst the lowest expenses for funds in that category and if you buy through TDAmeritrade, there are no fees to buy or sell. Not only that but $10k minimum is also waived.

The only problem is that it takes about 3 days to get in or get out of this trade, a move that may have been implemented to prevent people from daytrading mutual funds.

Anyway, I finally got filled friday at a price of $13.29. Lets see if this trade works out. I’m not really good at timing the market and as seen by my WCI puts, I’m actually quite terrible at this sort of thing! But since I don’t want to sell any of my stock, this way, I’m hedging my bets. But hopefully, I can get better at this sort of thing.

Speaking of WCI, Bill Gates’s foundation announced they were bailing on it but that didn’t help. The stock still went up! Its up 30% since October!

Friday Rant

Posted on February 9, 2007 by Nirav

I came across this article last night, 32 Reasons Why The Stock Market Will Jump This Year.

While its written as a serious prediction, I personally feel its more like a christmas wish list or a list of finalist answers at the Miss World Beauty Pagent!. Here are some of the gems

#1. Housing and Auto-manufacturing weakness will subside
Based on what? Major layoffs in both industries?

#5. Unemployment with stay at record lows.
Hmm…with the massive layoffs in Housing and Auto-manufacturing, you really think so?

#7. Inflation will continue to decelerate, with CPI averaging around 2.0%.
Hmm…ever since the minimum wage was jacked up, small business around where I live jacked up the price of everything along with it. That doesn’t sound like low inflation to me. Anyone who thinks that CPI is an accurate measure of inflation makes way too much money to begin with. Once you take out all the factors that cause inflation, of course you’ll be left with 2%. What a doofus.

#11. The US Dollar will firmer up and even maybe become stronger
With almost all the worlds major currencies strengthening against the USD how is this going to happen? Oh yeah, Bank of Japan is enforcing a weak Yen policy. And of course the USD will strengthen against the Iraqi Dinar! And with China owning a Trillion USD do you think a strong Dollar is actually in our interest????

#12. The U.S. budget deficit, which is currently 1.5% of GDP, well below the 40-year average of 2.3% of GDP, will continue to trend lower as healthy economic activity continues to boost tax receipts substantially more than estimates.
Uh…isn’t the US GDP is currently mainly comprised of government spending? Thats not really a show of healthy economic activity. Although it is true that the tax receipts are up more than estimated.

#15. The mania for commodities will completely end.
Yeah Right!!! All those millions of people in India and China who can now afford to buy a car and a decent place to live will choose to buy plastic go-karts and tents instead of regular cars and houses that use steel & copper. Is he completely blind to the global industrialization thats taking place? Every year China adds to its electricity generating capacity by the same amount as the entire UK. This electricity comes from coal and is used to make more cars and power more houses. The dude’s smoking crack now.

#16. Oil falls to $35 to $40 per barrel and eventually $20-$25.
#19. Gas prices will drop below $4/mcf.
#20. Gold will drop below $550 per ounce
This was written on the 1st of Feb 2007 when Oil was around $50/barrel. Its since gone up to nearly $60 and is probably on its way up. Corn has quadrupled to over $4/bushel making ethanol almost as expensive as gasoline now. Similarly Gold is also up to $665. I actually bought some GLD (the gold ETF) 2 days ago and I’m already up 7%. I predict its going to $800 in 2 years.

#17. Peace in the Middle East.
HAHAHA.

Some of the points are actually valid, but the ones I’ve mentioned are pretty stupid. Like I’ve said before, I’ve taken exactly opposite bets in my stock investing, so of course my views are out of line with the authors.

What do you think?

$10 Billion Dollar Stock Buyback

Posted on February 7, 2007 by Nirav

BHP Biliton (BHP) just announced a $10 Billion Dollar stock buyback over the next 18 months!!! Thats on top of the $3 Billion previously announced. About 4 months ago I bought BBL. BHP also trades as BBL and BBL trades at a slight discount to BHP, making it cheaper to own blocks of 100. Since BBL closely follows BHP it doesn’t matter which one you buy. I’m up 8.5% since then and I think there’s still a long way to go.

Most of my holdings are oil & gas or commodity companies. I’ve also been selling naked puts sporadically on companies like STP and CRDN which have done pretty well. Well enough to offset my losses on WCI. Since I started shorting WCI in October its up about 30%.

Has anyone had luck consistently buying options instead of selling them???

Achieving financial freedom through passive income

Category Archives: Stocks