OneOnian Money Talk

1920 - 2003 Historical Median PE = 15

Link: http://www.investopedia.com/articles/technical/04/020404.asp

Link: http://en.wikipedia.org/wiki/P/E_ratio

Link: http://en.wikipedia.org/wiki/File:SP500pe.svg

I’ve been investing heavily (50% of portfolio in BAC and WFC) into the big financials since the FED took the rate to basically nothing. With recent announcement of keeping the current low rate for “extended” time, large banks will undoubted rip in profit as they continue to benefit from the spread.  And despite the current run since the low in March, I think there’s much head way going upward. What the market did since March is the correction for the severely depressed bear market, but have not shown the earning potentials in growth.  At least not until the banks stabilize the mortgage mess and when the financial statements start to reflect earnings, regardless when this would happen, but when it does and when the low rate disappears that’s when to rotate out of the big financials.

Amit Shah wrote a good article on big financials on seeking alpha.

http://seekingalpha.com/article/174773-wells-fargo-jpmorgan-and-bank-of-america-stock-prices-can-double#comments_header

If you don’t believe government policy can change the tides of the market, then you should learn your history. Throughout the history, government policies, fiscal, spending or tax related, all have a direct impact on the market. It’s one of the fundamental market movers.

And if you believe health care reform will pass during the Obama administration, then you can bet there will be fundamental changes to the market. And if you believe the public options is out of the door, which seems to be probable according to latest debate, then I have to say health cares and pharmaceuticals will be the ultimate winners. All for the simple fact of increasing demand and reduce cost. Even if there will be price control, hopefully not like the regulation on utilities, the total volume, per profit x demand, will go up.

Between health cares and pharmaceuticals, I prefer the former. In health care, you use client’s premium and funds to invest. It’s like getting a free loan. Ever wonder why Buffett are heavy into insurance? In pharmaceuticals, it is more speculating than health care. Big Pharms need to constantly build new products to keep its pipeline full. One drug can make or break a small company. Since no one can predict what drug a company can produce 10 or 20 years down the line, a company need to keep rebuild its moat, so I consider it as less of an investment over the long term than health cares.  

Okay if you are still with me, let’s now consider the best breed in the health care sector. Among: WLP, UNH, HUM,  AET, I think WLP and HUM have better financials. And WLP has more quantitative and qualitative advantages. I do have one concern with WLP and that is the heavy insider sales in the past months.

The verdict: if you believe the health care reform will pass without the public options, then buy WLP. And hopefully you have an opportunty to buy below the 200 days moving average.

Heck, even if you don’t believe anything, you can still buy WLP, because it’s a bull market. And the chance of you go wrong in the long term is much slim during this post-Lehman recovery era.

A while back, I recommended the Financials stocks because I thought they were going to be severely depressed and should have the potential to give out the great returns as market recovers. We are undergoing that process now.

Once these under appreciated have been realized, what would be the next set of plays? I would like to suggest these three areas: Inflation/dollars plays, Media Phone and Devices, and Green energy plays.

To battle againist inflation and falling of dollars, I am looking at currency plays and growth stocks. I am considering Brazil Agriculture, China Med Caps, European ADRs.  A good link for Brazil and China Agriculture http://www.idb.int/intal/aplicaciones/uploads/publicaciones/i_INTALITD_OP_44_2006_Jank_Jales_Yao_Carter_.pdf and for top 500 Latin Comanies: http://www.thefreelibrary.com/The+Top+500+companies+in+Latin+America-a0134781814 for ADRs http://site-by-site.com/adr/latin/adr_bra.htm

For Media Device and infrastructure, I like GRMN, AAPL, RIMM, Goog, CHL, ATT, CHU. Some of these might be great companies, but the price is also up there. I see GRMN with some potentials and is only one offered at a decent price.

Lastly, Green Energy. A number of ways you can play this. One is of course the source play, go for solar or wind directly, I like STP, SPWRA and FSLR are a little pricey. Or you can go for the industry that would benefit from CO2 reductions, I like Rails in this sense. The more rails they build, the bigger their market, with limited players in this field, domestic rails are operating in a local duopoly environment.

 Generally speaking, values stocks outperform in period of slow expansion, and once the market starts to grow, we should start to shift from values stocks to growth stocks, large caps to smaller caps.

Returns are now up-to-date.

It’s been a while since I last updated this page. Between moving to DC, getting my 65, taking over 3 roles and responsibilities at work, re-model my bathrooms with tiles, giving out free financial presentations, traveling to China, writing my first book (it’s true), I finally will have some time to reflect on what has been happening and will share some of my learning and experiences with you. Check back soon, you will get a glimpse from the pages of my new book.

And yes Pass the 65 is probably the only book you’ll need to pass that exam, plus some common sense.

My top holdings now, since March 2009, are BAC and WFC. Both count over 50% of my portfolio right now. Others been V, CEO, BRK.B, GOOG, GRMN, ETFC, and still more 15% in cash. This run since March is been very bullish, I don’t know how long it can last with this kind of rate of growth.

Financials, especially BAC, were way undervalued, market cap at third of equity vaules. It doesn’t make sense to me. And given BAC is now profitable, it should be valued at least at equity.

The goal is to rotate out of these undervalued stocks as market play catch ups and get into growth. But this might be a long time before all price gap can be reached. one to two years? wait and see.  

The current concerns with global inflations, including in China, Europe, US, the regulator bodies are tightening the money supplies. Both Europe and China have high interest rates. With US trying to recover from its housing crisis, the rate here remains low. Nevertheless with tighter money supply curing the inflation globally, no doubt there will continue to be slow growth. Slow growth means commodities such as metals will decrease in demand and hence in price. The notion of commodities will head lower is further supported by the tremendous run and speculative hypes in the past years. In deed we have seen the commodities coming off from its high couple month ago, but time frame is still short of average down trend, meaning there is more room for the commodities to continue to fall.

Some might argue that the general stock markets in US already came down from the peak of last October, we probably already hit the bottom and on the way to recover. Even some of the commodities-related companies are already priced low enough for value plays, to that extend I would agree. But slow growth meaning these commodities companies will not able to recover as fast as some other sectors, like Financials. With current interest rate at all time low and the special windows extending to some of the big financials, they are positioned to benefit the most from the yield spread. Already we see the financial sector rebound from their lows. I think this will likely to continue until FED ease off the rate.

I wished I’ve came to this generalization earlier, the signs were long before my eyes, the oil coming off its highs and Global inflation concerns. While I will continue to work on the timing in the future, I think we are currently at very early stage of this cycle, so we can still make the transition and benefit from this trend.

This is a general disccussion of the current trend, by no means, I am suggesting to dump the commodities stocks or buy the financial at the instant. Please be patient and let the market come to you for favorable conditions.

http://www.oneonian.com/books.php?book=MonkeyBusiness

http://www.oneonian.com/books.php?book=ReminiscencesOfAStockOperator

http://www.oneonian.com/invest.php?report=2008_Q2

http://www.oneonian.com/books.php?book=YouCanBeAStockMarketGenius

http://www.oneonian.com/books.php?book=TheCompleteTurtleTrader

http://www.oneonian.com/books.php?book=TheAgeOfTurbulence

• Bernanke: Increase in unemployment hasn’t materially affected the economy, but raise in  oil and energy price has added upside risk and now number 1  concern at FOMC.   http://online.wsj.com/article/SB121305516121159161.html?mod=hps_us_whats_news
• JPMorgan: Current increase jump in unemployment might misinterpret current economy, not because there are fewer jobs, but more are looking for jobs, as result of increase in living expenses. so what happens when more troops coming home?
• In 2001 after 9-11, consumer spending carried economy through the slow down by invest in housing, is consumer spending going to carry us through this slow down through increase in energy spending? Housing in 2001 is an investing act, the current energy spending can be a thrift act and cutting corner and cost else where. 
• How money is flowing? 2001, end of dot-com bubble -> fear drove people away from stock -> low mortgage rate of 6% -> cause people to move money toward housing -> new purchase create more far spending due to furniture’s and etc. -> Stimulate economy + large speculative play -> housing bubble today. Today: Housing bubble -> fear in housing -> stock correction + economy correction -> fear in stock -> where will money go?  -> holding money -> recession -> but high energy cost and living expense + technology boom -> lead to some circulation. -> with war end, soldiers returning home yield more unemployment and decrease in Gov defense spending.
• Economists like the Chairman of FOMC are smart, Bush is economically ignorant, is Bernanke concern been carried out by congress?
• Central banker adjust interest rate several times a year and accordingly with the economic cycles and trends, so shouldn’t your portfolio do the same?
• Trust is an important requirement to free capitalism, when is China going to catch up to US with so little of personal trusts and overwhelming amount of deceive? “Reputation and the trust it fosters have always appeared to me to be the core required attributes of market capitalism.” -Greenspan
• Another point on the China economic growth, the general China public seems to have aspire for the security of goverment job, seems to be especially true in the current market force, but risk taking is essential for economic growth. Like the bullet above, the general China mentality is not there on par with US, yet.  
• Some of the problems in China include the banking system, monetary and exchange issues, all possibly signals to inflation ahead. As the current China policy tighten its credits, can it effectively contain the inflation or is it already destined to burst and lead to the “china bubble?” Many problems as result of the last decade economic reform formlated with Deng Xiaopen will finally sureface?  ref: pg300 Greenspan,
• “The natural effort of every individual to better his own condition … is so powerful a principle … capable of carrying on the society to wealth and prosperity.” - Adam Smith. Thus we must do or work on what we love to do. “free to pursue his own interest his own way” creates motiviation, which generate greater productivity which leads to prosperity. Individual who compete for private gain as if “lead by an invisible hand.” This, at management level, leads to the importance of incentives for growth.
• Growth = productivity + quality of product.

2008 Q1 Quarterly Report Now Available at

http://www.oneonian.com/invest.php

As the first quarter of 2008 comes to an end, it’ll mark the second consecutive losing quarter for the U.S stock market and as well as my own portfolio. Numerous great writers and investors had suggested individuals need to emerge from a bear market to test the investment principles and their own characters. Regardless the state of the current housing crisis and mortgage turmoil, I can now feel and finally comprehend this echo that I read so many times before.

Since the fundamental principles of my investment strategies are greatly based off Graham’s The Intelligent Investor, I think an evaluation against the book would be a good way to reassess my strategies.

From the very first content in the first chapter, Graham defined investment.

“An investment operation is one which, upon thorough analysis promises safety of principle and an adequate return.”

And I think Buffett said it best in the preface on how to achieve successful investment over a lifetime.

“What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

From these two key notes that underline the importance of the safety of the principles and the control of emotions, the reflection on my past endeavors shown these two areas will require further improvements.

As a novice investor, looking back at the transactions I made over the past fifteen months, there were some good investments and some bad investments. I am glad the ratio of my good judgments is increasing.

However some judgments, from the selection of the stocks to the timing of the transactions, failed to pass Graham’s teaching on the safety of the principle. To guarantee the safety of the principles is to obtain enough margin of safety at the time of investment. While the intellectual framework and the ability to pick better investments is partly innate and partly a slow process that requires continuing learning, the timing is largely controlled by emotions that unfortunately can be effected by the swing moods of Mr. Market. Practice patience and the courage to act when the market is panicking are good antidotes to emotional influences.

Naturally the question follows is what to wait for? Graham urges to buy when there is a margin of safety and hold preferably indefinite. Over a horizon of twenty years or longer, the market should yield a positive return. After experiencing the up and down of this passing bear market, this is where my belief start to deviate from the traditional buy and hold long.

Buy and hold long should be the method during an upward cycle, where selling stocks with good fundamentals will probably end up at lower prices then the price to buy it back at later time. Different strategies should be practiced at different market cycles.

Regardless of bull or bear market, eventually all will come to an end. Like the bull market that ended last September, the signs of an overheating market were apparent, increasingly high PE ratios with rate of growth that’s unsustainable. Most of my emerging stocks such as ACH, PTR, CEO, YZC, GRMN were approaching over 50% to 90% rate of return for merely three to four month leading to the pinnacle of the last bull run. Buy and hold during this period of unsustainable growth could only mean pay dear when the market undergoes correction.

In order to guarantee the safety of principle, buy and hold should not be the uniform strategy for the ages. Alternatively, it should vary with the general cycles of the market, not the short-term gyrations, but the long-term bullish or bearish cycle that last over five, ten years.

Within a lifetime of investing, I believe large transactions should take place during the climax of each cycle. Large portions of the holdings should be sold or brought depending on whether the current market is excited or distressed, respectively.

Having held through the pinnacle of the bull market last year, I stuck through with the buy and held idiom and missed the chance to sell portion of my holdings. But, with the Dow Jones approaching closely to 12000 and a frantic overselling all across the market, I upped my personal investments this past quarter, a 50% increase from previous quarter, the most I could contribute. These investments should yield a handsome reward once the market starts to recover.

Like mention earlier, in a bullish market, smaller and smaller periodic investments should be made with limited number of selling orders. As the length of the bullish market expands, those purchase order should gradually dimenishes. Of all the cycles occurs in market, the bull cycle should have the lowest number of transactions.

Different strategy should be used during bearish market as we are experiencing right now. Whether it’s a “U” or “L” trend, bearish cycle can last, some “experts” have suggested about an average of 400 days. During this cycle, the trend go through smaller interim cycles with longer wavelength than generally seen in a bullish market. Same selling or purchase price can occur multiple times. Relative short-term patience is needed to wait for the Trough or Apex of the trend. Here I might even consider the reference of the technical analysis. The period of the smaller cycles is at least a month in range. Smaller selling and repurchase transactions can be practiced here following the trend but the holding time should last at least half of the period of the interim cycle. The general day trading is still strongly opposed.

Further, the amount of transaction should be large enough, so that the commission costs do not eat away the short-term profits. I am currently considering this to be less than 1% of the principles. The principles should also be small enough, assuming the fundamentals of the companies still exist, only a small percentage of individual holding should be traded with the trend, say around 30% or less.

The strategy discussed above evolved from my previous investment principle. As such, the underline companies of each transaction are first valued based on the fundamentals of value investing. As oppose to Warren Buffett’s advice in the ability to ignore the daily up and downs of the investments, in a bear market, due diligent is needed as it requires more active participation of the market. Trades and shot-term profits can be made by anticipating the bearish cycle of sinusoid trends.

As always, I will continue to shape my investment principle. This will be an ever evolving process. Current strategy does not reflect future strategy. I am content to have The Intelligent Investors as the foundation to my investment strategy, and optimistically anticipate with each amendment, the results will be shown in more profitable returns.

http://www.businessjive.com/

When Genius Failed

http://www.oneonian.com/books.php?book=WhenGeniusFailed

For those that can’t spell Oneonian, I created 2 new domain names just for you.

Now you can use www.YuanPlace.com and www.HYfinancial.com to get to OneOnian.com.

In the past couple months, the subprime crisis certainly made some people discouraged at the market. I decide to give this entry about market outlook ahead of the 1^st quarterly report. As I had already executed, there are a few things you can also tweak during this turbulent time to your gains.

With half of equities in emerging fund, OneOnian fund was in a gyration since year 2008 started. At some point in January the fund was down 14%. The cause of this is due to the deteriorating of the credit issues in fundamentals of the market. However as banks started to write down big losses and Feds started to take notices and actions, I believe this bearish cycle is coming to an end. The market will start to alleviate and buyers will start to pick up bargains. Even the big wave of write down have passed, we might expect some secondary and possibly tertiary market effects that might cause a few more ripples. Mostly side effect will come from consumers and inflations related.

During the past quarter I did a few things to take advantage of the market downturn. First I swapped different tax lot of the same stock. For example, I had multiple purchases of ACH, some were brought at higher price than others. Assume you still believe in the fundamentals of the company, when the market offers a price at 20, 30, or 50% from your highest purchase price, you can sell those stock and buy them at lower price. The gain is the tax advantage. The short losses can offset your gains at normal tax deduction. With long-term capital gain tax at 15% and compare to my higher than 30% income tax, that’s 15% gain. However, to fully take advantage of this, the numeric gains should be much higher than the commission you paid to do the swap.

Next, I dropped my position in PTR, GRMN and all of my smaller positions like CHL and MT. Each had different reason (I will cover them in my next quarterly report), but the general selling is to free up some fund to purchase other stocks with higher potentials of returns. In addition, I dumped another $6k into the fund and brought more ACH at $33/share, 2000 share of ETFC (Etrade, Financials) at average of $4.79, 250 share of FNM (Fannie Mae, Mortgage) at $31.90, more shares of CREE (CREE, LED) now at average of $24.43, and today, 50 shares of DRYS (DryShips, Shipping)  at $82.50. I believe all of these purchases suffered a substantial drop, now with a much higher return potential then the stocks I sold. Also, through this series of trades, the portfolio is now better diversified. The advantage of diversification is subject to another discussion.

In the end, is not the behavior of the market that determines the size of your bank account, it is the ability to remain patient, clear-minded, judge and execute even amid the most panic influences that will yield you the greatest gains.

Secret of the Ages.

http://www.oneonian.com/books.php?book=SecretOfAges