Money

Thanks to the rising price of oil and the mortgage meltdown the stock market has been what the British would call “dodgy”. There’s a lack of confidence in the ability for companies to perform and earn, and that’s driving the markets down.

But it’s not all bad news. Bear markets can bring good investing opportunities and there are numerous strategies you can employ to minimize the erosion of your portfolio and even make some money …

1. Don’t invest. A lot of investment funds are holding a larger than normal cash position right now. This is simple cash preservation and the idea is to wait out the bear; when the markets are going up, it’s because stocks in general are going up, and your chances of picking the winners are much better.

2. Go short. Shorting a stock is betting the stock will go down. You can place your bet by buying put options which is the option to sell a stock at a price in the future that you think will be higher than it will cost to buy. You can aso write call options. By writing a call, you’re giving someone else an opportunity to buy your stocks at a specific price and if the stock goes lower, the option is useless and you keep the premium (the price of the option) when it expires.

3. Finding the winners. There’s always smart money somewhere. After the dot com crash, massive amounts of capital went into property (and fueled that bubble). You want to look for those opportunities rather than focusing on the negatives; oil has been on the rise. And with it, alternative energy plays like solar have held fairly strong. Look for companies that are solving the current problems.

4. Go bargain hunting. This is probably one of the best strategies you can employ in a bear market. After all, it’s all about buying low and selling high. Companies that are holding strong against the bear or companies with low price/earnings ratios that are primed to bounce back can usually be bought at a decent discount. Also, stocks that are down while the company is still earning well and paying a good dividend can be a great investment.

There are risks to all these strategies, just as there are risks in a bull market. But using bear market strategies in a bear market is one of the keys to investing success.

And that’s no bull.

There’s been a lot of chatter about Facebook going public. A lot of people don’t think it’s possible. And I tend to agree … or at least, I used to.

Social media sites like MySpace and YouTube usually end up getting purchased by bigger companies for one simple reason: they can’t financially stand on their own. It’s really difficult for a social media site to earn big returns because users are there to do other things. They don’t click on ads.

Cracking the Web 2.0 Code

Someone’s going to do it. Sooner or later. And of course there are many much smaller websites that are profitable. Just not IPO worthy.

There are a few reasons I like Facebook as an IPO opportunity …

1. Branding. There are a lot of good IPOs but the truly great ones happen with established companies that everyone knows. Companies that have products or services that a lot of people use and depend on.

2. Creativity. More than most social sites, the Facebook team has been willing to try out different (and sometimes controversial) things. And if you want to cook up the omelette that is profitability, you have to crack a few eggs.

3. Focus. Companies the size of Facebook eventually either go public, get bought out, or dwindle into obscurity. Sure, Mark Zuckerberg always answers the “IPO question” by saying they’re focused on building the company with no plans to go public. That’s savvy politics and it’s the right focus to have right now.

Facebook’s Edge Over the Other Guys

I also see some really basic and fundamental advantages that Facebook has over other social media sites. Advantages that could lead it to profitablility and a successful IPO …

1. Partnership Leverage. Facebook apps has done two things; it’s allowed third parties to make a great deal of money with facebook which never hurts your popularity. But it’s also given Facebook more access to multimedia (like YouTube videos) dynamically - which translates into all the fun, without all the bandwidth costs. The Facebook API should bring more of the same, but put Facebook in the earnings seat.

2. Effective Dull Space. Your typical MySpace page looks like someone threw up on a Jackson Pollock painting. Making it difficult to make anything stand out. Facebook’s interface is much cleaner, even with all the wild apps that people run. This makes it a lot easier to present advertising and actually have people notice it.

The Patience to Get There

Amazing “can’t miss” IPOs don’t happen everyday. They come along once every year or two. And they offer significant investing opportunities … think Google, Mastercard, Visa.

There are a ton of great companies to invest in, but grabbing these young stocks of world class companies brings in strong and sure returns in the first few years. So I’m always patiently looking at the horizon for the next one.

And maybe. Just maybe, in 2009 or 2010, it’ll be Facebook.

When it comes to picking stocks, or picking a winner in anything, everybody’s got a system. A magic calculation that can tell the future.

Well, here’s mine …

Above, you can see a historical stock graph and 3 spiral swirls. But not just any kind of spirals … golden spirals. The golden spiral is based on the golden ratio. Otherwise known as Phi.

Phi is a mathematical pattern that we see everywhere in nature, from the shape of seashells to the very structure of our galaxy. It’s everywhere. The Golden ratio which is 1 to 1.618 is often viewed as the measure of perfection. It’s amazingly aesthetically pleasing to the eye and it’s used in graphic design a lot (called the rule of thirds).

Phi is so ingrained into everything around us that many scientists believe it holds the key to unlocking the greatest prize that physics has to offer; the grand unified theory. I tend to agree.

What Stock is This?

The stock is one of my favorites; Visa. In my graph, the first two spirals track actual rises in the stock. The third spiral predicts the next rise and fall. I also keep a spreadsheet that tracks the weekly compound growth of both Visa and Mastercard and I’ve put the Visa numbers in the graph for additional reference.

Are You Serious?

[Dramatic pause] … Hell no.

First, let me say there are a number of REAL technical indicators including historical performance, investor sentiment, and corporate fundamentals that make these predicted numbers very possible.

But I’d never make a trade decision based on my pretty little spirals. Or anyone else’s. Here’s why …

There’s a fundamental PROBLEM with any system that tries to predict the future. And it’s called the Heisenberg Principle. Which basically states that if you make a prediction, and then act on that information, your actions will have an impact that changes the future. Thus, whatever you predicted won’t happen.

I’m talking about this because I see a lot of advertisements for amazing stock trading “systems” out there. Don’t get duped.

I’m sure some of them have some success here and there. But according to the laws of physics, the more people that use a successful “beat the market” system, the less chance it has of success. The more people that game a future prediction, the more impact there is that will void that prediction.

Of course, there’s always the theory of self-fulfilling phrophecy.

Now there’s a system.

The mechanics of successful investing is pretty simple. Buy low and sell high. The less simple part has to do with what to buy and when to buy it. In other words, selection and timing.

Stock selection and timing are really closely related. The key is recognizing both current value and potential value. If the current value is less than the potential future value, you’ve got a winner. And of course if the opposite is true you could still have a winner by shorting the stock (betting it will go down).

Finding Stock Opportunities

There are literally thousands upon thousands of stocks out there. So first, you need to find them, and find out a little about them …

1. Yahoo Finance. This is one of my favorite places to do stock research. It’s full of big breaking news on companies and general economic trends. Their stock quotes are 20 minutes delayed but they give you company profiles, key statistics, info on competitor companies, links to news and blog commentaries and quotes on options pricing. Yahoo Finance is a great place to start.

2. Online business news. Big media players like The Wall Street Journal and Forbes are great places to find out who’s being talked about and what’s being said. You can also check out Investor’s Business Daily, The Street, and The Motley Fool. I don’t subscribe to any of these sites because, to be honest, I don’t want to be sold on some amazing “golden opportunity”. That’s a good way to lose money. I want the public news. The big chatter. I want the hook, not the line and the sinker.

3. The boob tube. It’s also good to tune into the tube and watch the business reports on BNN (Canadian Business News), CNN, and MSNBC.

Determining Value and Potential

There are companies that lose money but their stocks perform very well. At least for a while. At the same time, there are companies with solid business models that nobody cares about. What’s the deal?

A company that actually produces a profit is going to offer you less risk. Especially in the long run. Plain and simple. But regardless of that, a stock’s rise is heavily based on confidence or market sentiment.

If a lot of people believe the company has great potential, up goes the stock. It’s demand for the stock and belief that it will continue to go up that pushes up the price. At the end of the day, nothing else matters nearly as much as confidence.

This is why I don’t like super-secret “tips”. I want a stock that everybody knows about. That everybody is talking about. A stock that everybody is buying which drives the price up.

If enough people believe, it will go up.

And if those beliefs are based on sound fundamentals, it’ll keep going up. If not, it’ll go down, and probably a lot quicker than it went up.

If you park your money in the same place for 20 years, you can do well. But a lot of times you’ll just keep up with inflation. And sometimes, the only gains you make come from steadily pouring money into your parking spot over many years; it’s just a savings plan. Not an investment plan.

Great returns come from catching the waves. Good waves can last anywhere from 2 to 5 years. You hop on, ride high, and then hop off and look for the next one.

The dot com bubble was a nice wave. And over the last few years property has been a good wave. The real question though, is … where’s the next big wave?

Wave Spotting

The answer has 2 parts. First, the sectors or industries should be experiencing strong growth. And second, where individual companies are concerned, they should have strong growth potential.

And by strong growth potential I’m not asking myself “are they cool” or “are they in the hot industry of the moment”. The question I’m asking is “can they sell it”?

Big Wave Candidates

Here’s a list of strong sectors to keep your eye on and maybe get involved with. In each of them there are a whole host of companies.

I won’t list specific companies because you should do your own research. And no matter how hot an industry is, some companies will bring stellar performance and others will completely bomb.

1. Commodities

Have to mention it, just because the cost of everything (energy, grain, metals, etc) has been on the inflationary rise. Commodities are the raw materials for everything else. When they go up, the cost of everything goes up. And that’s the problem with commodities that I don’t like.

Not only do rising commodity prices have the power to hurt every other investment opportunity out there (costs rising faster than revenues), but they have the power to hurt their own earning potential too.

2. Alternative Energy

One good side-effect to the high cost of commodities (oil) is the strength in alternative energy sources. Solar is very strong (I resisted the temptation to say it’s hot). Wind is strong. Biodiesel.

It’s also worth looking at the technologies that make these energy alternatives easier, more efficient, and cheaper to produce.

3. Food Production

Companies that produce phosphates and potash (fertilizers) that aid in agricultural growth and food production have been very strong. This is, with regards to chemical pollution, a controversial industry. But given the alternative (trying to feed the world with lower crop yields), it’s got nowhere to go but up.

4. Financial Companies

Banks and investment corporations have been taking a bath thanks to their risky plays in the subprime mortgage market. And they’re still wet. But they’ve got 2 things going for them.

One, they’re down and that translates into “they’re cheap”. Two, finance is the cornerstone of every other business and investment vehicle. They don’t just make money, they are money. In the second half of 2008, we’ll really start to see who the comeback kids in the financial sector are.

So those are a few hot sectors. There are others, and of these I’m more bullish on alternative energy and finance because I can wrap my head around them easier than the others. Which is an important point in itself …

If you don’t understand how they make money, gravitate towards something you have a better understanding of. It’ll help you sort the winners from the losers a lot easier.

Post your wave faves for 08 and beyond in the comments.

I get a fair amount of traffic to my post on Visa Stock. And it’s clear by the search terms that a lot of people are wondering ‘Should I buy Visa’?

If you got in on the IPO at $44, you’re a pretty happy camper. Even if you got in on opening day at around $60 it’s still a pretty sweet deal. But what about now? As the price continues to rise?

Hindsight is Not 20/20

You know how people buy lottery tickets and they’re just one number out from winning a couple grand. “Ohhh, I had 42 instead of 43″.

Well, you could have had 10 or 7 or 22 and you’re just as far away from 43 as you are with the number 42. A different ball came down the chute. Period.

What hindsight does is give us history. It gives us experience. And that’s the true value of it. It can’t tell us the future, but it can lead us in the right direction the next time a great opportunity comes along.

Yeah, Yeah … So What About Visa?!

Visa is a long term hold (1 to 5 years). It could experience rocket growth, or it could experience very conservative growth. I can’t tell the future. No one can.

But we can learn from history. Huge ROI, limited-risk opportunities do not come everyday. You have to be ready to jump on them when they come along. So I’d say Visa is a great place to park some cash if you’re getting in now.

And then, watch, wait, and listen. When another killer opportunity comes along, you can cash out a few lots of V or whatever and jump on it.

Always watch what’s coming down the chute.

Your ball 43 is in there somewhere.

Always remember: Smart people make money when times are good. Rich people make money when times are bad.

It’s pretty much all people have been talking about; Bear Stearns, the fifth largest investment bank in the U.S., whose stock was up at $160 last year, got blown out in a firesale deal to JP Morgan for $2 a share.

Playing the Patience Game

A lot of people that get into trading stocks jump in, buy a bunch of stocks, and then sit and watch the ticker hoping for the best. Or, they get into the game because they’re girlfriends’ second cousin’s husband is a trader and gave them a (not so) hot tip.

The smart way to play is to follow some basic “market truths” and exercise the patience you need to jump on the smart opportunities. Here’s a quick list of what to look for:

• Extreme devaluations on bad news
• Small caps than can leverage big gains (percentage wise) on good news
• Kick-butt IPOs
• Buy while people are selling and the price is dropping
• Sell while people are still buying, and this is important; before the price peaks because you can’t predict exactly when that will be

So, while everyone was reeling from the talk of a financial system meltdown, my buddy Tom (Trader Tom), jumped on Bear Stearns yesterday like a fat kid on a smartie at $4. This morning, he jumped out at $6 and made a quick 50% on his money. Not bad for a days work.

He could have done better ($8), but greed will kill you in this game. If you’re patient and conservative you will more often than not, make money.

And the best part … he’s buying lunch.

I’m a big fan of Panasonic; all my stuff is Panasonic. Over the years I’ve found that they make great quality electronics and, you either get more features for the same price as other premium brands, or you get the same feature set for a better price.

In December, my TV (which I’ve had for 10 years) finally gave up the ghost. It was time to buy a new one and after some deliberation I finally narrowed it down to 2 choices:

1. 42″ Plasma full HD
2. 32″ LCD 480i

Right now you’re thinking ‘Woohoo - get the plasma!!’ Which makes a lot of sense because even though I don’t have an HD player right now, everything’s moving towards HD and I might as well plan for the future, right?

Well, that’s just your consumer brain thinking and it can be very convincing.

But I run my personal finances with a business mentality. And one of the worst things you can do in business is plan for the future. The reason is simple; most of the time people spend way too much and go way too big too soon … and noone can tell the future for sure. If you blow your bankroll on startup and preparing for what “might be”, 9 times out of 10 you’ll find yourself in trouble.

It’s far smarter to start small and suffer through the growing pains when you’re building a business. It hurts, it sucks, it’s hard … but it’s the right way to do it.

My Brain Gave Me No Choice But to Make a Business Decision

I’m sure you’ve already guessed that I bought the 32″. And it’s awesome. I’m very happy with it. The price difference was about $600, and the power usage is a whopping 540 watts for the plasma vs 140 watts for the LCD.

The problem isn’t affordability. I can afford better than either of these. And hey, it’s just a TV; it’s not the groundwork for a multi-national business consortium. But I just don’t think like a consumer.

That’s the problem.

There was a lot of speculation on how well the Mastercard IPO would do in 2006. The stock’s done well. Very well. And investors are waiting anxiously for the coming Visa IPO which has got fortune-maker written all over it.

These public offerings are raising the stakes in the credit card arena significantly and the offerings we’ll see from the various credit card issuers as they duke it out is going to get a lot more competitive.

Understanding Trade Terms in General

Most businesses have credit accounts with other businesses (their suppliers). When it come to trade terms on business-to-business transactions, the most common set of terms is net 30 days; you buy something and you have 30 days from the invoice date to pay for it.

But there’s another common term that’s used for B2B credit accounts called 2% 10 days. What this means is that if you pay within 10 days of the invoice date, you get a 2% rebate on the invoice amount. 2 percent 10 days is a set of terms that’s usually forced on small companies by large retailers and distributors because it’s a good deal for these cash-rich buyers.

A Closer Look at 2% 10 Days

Large retailers (and cash-and-carry distributors) have a steady inflow of cash. So what do they do with it? Most businesses keep their liquid cash in the bank. At say, 4% annual interest, it’s not a great investment. But it’s liquid and available.

If you look at what that cash would earn by sitting in the bank for 20 days, it’s (4% / 365 * 20) = 0.22%. So in 20 days you could make $0.22 on $100. If that’s money for your Ferrari fund, it’s gonna take a while.

But if you’ve got a 2%-10 deal with your suppliers then effectively you’re paying them 20 days sooner than net 30 in exchange for 2% off the invoice amount. Which equals $2.00 on $100 or almost 10 times what you can get by leaving that money in the bank and paying your bills in 30 days. Sa-weet!

Generally it’s better to defer your payables longer. But if you’ve got a steady inflow of cash, then you might as well leverage it to earn more money. Small suppliers don’t have much choice but to accept these terms, and if they’re cash starved it can be helpful (although pricey).

The American Express Plum Card

So here’s what American Express is offering … the Plum Card gives you a 2% rebate if you have a monthly balance over $5000 and you pay within 10 days. Effectively, they’re putting these great trade terms into the hands of small businesses to use their card.

If your monthly balance is less than $5000, then you get a rebate of 1% for paying early. And if you need to defer your payables, you can pay 10% of your balance and defer the rest for 2 months interest free.

It’s a very flexible card and a pretty good deal for small to medium businesses or online businesses that use a credit card for a significant amount of purchasing.

So … Visa … Mastercard … care to up the ante guys?

Again and again I hear talking heads on the boob tube talking about how sitting on a diversified portfolio over the long haul is a great way to invest your money. And while that’s a safe bet, unless you get lucky, the chances are pretty good that you’ll never make a ton of money doing that.

If you want to make good money you have to catch the waves. You have to keep your money moving in and out of the opportunites as they come along.

It’s not fire-and-forget. You have to get in the game. You have to get involved in your own investing.

There are two kinds of stock plays I really like:

1. Buying small to mid caps on bad news
2. Can’t-lose IPOs

Both of those plays will give you better than average returns. And you can make anywhere from 200% on your money in a couple weeks to 500%+ in a year or two. A lot better than the run-of-the-mill 10% annual return you’ll make in a diversified mutual fund.

IPO Plays

There are lots of IPOs, but every once in a while something really good comes along.

It’s been 3 years since Google went public and it’s rocketed up 700% since then. And it was pretty much a sure bet from the very beginning. The barrier to getting in now is the high price and the question of how fast Google can continue to grow. They will grow, but how quickly they grow is what will determine the price (and the returns) over time.

Another great play happened last year. Mastercard, the number 2 credit card processor went public in May 2006. It opened up at around $40 a share and after a year and a half it’s up to almost 200 bucks. Sweet. But again, how fast will they keep up this pace of growth.

Don’t you wish you got in at the very beginning. Enter Visa …

Visa is the number one credit card payments processor in the world. And they’re set to launch their IPO early next year (February I believe). I haven’t read too much about the pricing but I would guess it’ll be anywhere between $60-100 a share.

Now I know what you’re thinking … credit card debt is a bad scene right now. The bottom could drop out of the stock if people don’t pay their CC bills right? Not so fast.

Like Mastercard, Visa is a payments processor. They collect fees for processing the transactions but they don’t lend money. They don’t take on that liability, the banks do. So if the economy is good, people are out spending and using their credit cards … yay Visa. If the economy is bad, then people rely on their credit cards to weather the storm … yay Visa.

If you’re looking for a place to park some cash for a couple years and get a good return, the Visa IPO is looking like a good place to do that.

Who says credit cards are a bad thing.