Value Investment Blog

Trade log for July

2010-07-31T11:58:00.001-07:00

July was a month when a lot of companies declared their quarterly earnings. I was fortunate enough to find some really cheap options and as expected good earnings from tech did the rest of the trick. Because the share prices traded lower after the initial reaction to the earnings, I could not make as much profit as I could have made. For example the intel call mentioned below could have been sold for 1.25$ which would have given me a profit of 600%. But this is the nature of the game and we should live with it. I dont have many big bets left on the table. The only big bet I have is pfe where I have bought shares, sold puts and bought calls. Apart from that all my bets are sold out of money puts for the front month except NVDA which fell a lot after I sold the puts on it and hence is now in the money. Moving forward I will stay mostly in cash and as market remains range bound I may sell some out of money puts for the front month. Here is my complete trade log for July.

Closed Trades
Bought Intel Jul 21$ calls for 20c. Sold for 40c for a 100% profit
Bought Microsoft Aug 26$ calls for 45c. Sold for 65c for a 40% profit
Sold Microsoft Jul 26$ and 25$ puts for 45c each. Expired worthless. 100% profit
Sold Jul AAPL 250$ puts for 11$, bought back for 5$. 50% profit
Bought Jul AAPl calls for 4.35$. Sold for 8$. 40% profit
Bought PFE 15$ aug calls for 15c. Sold for 28c. 90% profit

Open Trades
Bought PFE AUG 15$ calls for 15c
Bought PFE SEP 15$ calls for 80c
Bought PFE shares at 15.1$
Sold PFE AUG 16$ puts for 1.16$
Sold PFE AUG 14$ puts for 30c
Sold NVDA AUG 10$ puts for 40c
Sold NVDA AUG 8$ puts for 10c
Sold INTC AUG 19$ puts for 12c
Bought FAZ at 13.75
Sold MT 25$ put for 30c
Sold EBAY 19$ put for 50c

The long and short of Goldman sachs

2010-04-20T22:33:00.000-07:00

In the movie Devil's Advocate, the character of Kevin Lomax says to the Jury in defense of his client - "I don't like Alexander Cullen. I don't think he's a nice person. But this isn't a popularity contest; it's a murder trial". I feel the same way about Goldman Sachs.
But this post is not about Goldman Sachs; This post is about people who are now baying for Goldman's blood. SEC charges have drawn the first blood and now everyone from big banks, insurers to politicians are asking for more.

First lets talk about the big banks and insurers that bought the CDOs and insured the bonds. These giant institutes were trading against then a nobody hedge fund manager John Paulson whose expertise were merger arbitrage, not mortgage bonds. From 2004-2007, John Paulson was derided by everybody for betting against the housing market. He had been slowly bleeding money to buy protective insurance which was used to grant bonuses to the employees of these banks and insurers. Now that these entities are essentially bankrupt and are the wards of the state, they are playing victims. These entities are acting innocent as if big bear John Paulson and Goldman Sachs defrauded them. These banks and insurers are not innocent, they are criminals. It is because of the greed of the executives of these entities for small profits and bonuses that the whole economy of the country almost collapsed. But of course now that US Government owns 80% of AIG, they cant really be the bad guys, it must be Goldman Sachs and John Paulson.

Now lets talk about the politicians who are demanding that heads are rolled, fines are slapped and bans are placed on Goldman. Yes I was outraged when Goldman paid 4.7 billion $ to its employees while they were bailed out by the taxpayers but then again what would you expect Goldman to do with billions of the profit they make? Talking about big profits, who is supplying Goldman with cheap money? Who gave Goldman 100c on a dollar for the puts they bought from AIG? If Goldman benefits from government's corruption, you can't blame Goldman for it.
Politicians across the Atlantic are as populist as this side. One of them called Goldman "morally bankrupt" and demanded a ban on Goldman getting government projects. One must realize that Goldman Sachs is a corporation. Its job is not being "morally wealthy" but to make profit like every other corporation. If Goldman Sachs is "morally bankrupt" so is every government in the world. It is funny that politicians can get away with a lot more outrageous behavior and then have the gall to call others "morally bankrupt".

To sum it up, the problem that everyone has with Goldman Sachs is not how they deal with their clients or how they trade using proprietary software programs or how they compensate their employees but that they make profit. A lot of it.

Its business as usual at big banks.

2009-12-16T23:29:00.000-08:00

Today I read two news items about Citibank. First is that Citibank is paying off the TARP money to the US taxpayers. A smart move just in time to remove restriction on the executive Christmas bonus. Citibank is still the mess it was a year ago so what about the capital ratio of the Citibank especially after they have such a huge tax liability. Here comes the second news item in pictures. IRS has decided to give Citi a massive tax break so that Citi's capital ratio does not dwindle.

So lets put these two things together and try to see what just happened. Citibank is returning the money it borrowed from the US taxpayers so that it can award obscene bonuses to its executive but it still needs money so it gets a tax break from IRS which is effectively a bailout from the tax payers. So tax payers remain where they were but Citibank got rid of a liability and now they have no restriction on the compensation.

Another headline caught my attention. Citibank has blasted Abu Dhabi sovereign fund for not investing money in it as promised. So banks like Citibank and Goldman Sachs are willing to give much higher return on capital to sovereign funds and investors like Warren Buffet rather than accept the TARP money because the TARP money puts restriction on the compensation. Folks if this is not conflict of interest, I don't know what is. This behavior makes investing in these banks highly risky too.

In the end it seems that the only way to make money for an common person is to become a trader at one of these banks.

Why we still haven't hit the bottom?

2009-03-21T00:29:00.001-07:00

There is a good article on gurufocus explaining the point of view why the market hasn't hit the bottom yet and the recent advances in stock market are a short lived phenomenon. It is quite interesting read and I agree with most of these reasons. Although I haven't said it earlier but stocks don't look cheap to me. Most of the valuation tools have hit the singularity. I am still trying to get my cash out or hedge my positions. It is a continual process, a slow and painful too. Considering that VIX is down a lot recently, now may be a good time to buy SPY puts or a levereged short etf.
Coming back to the valuation, here is the article

The arrival of spring

2009-03-18T10:11:00.001-07:00

The cold hard winter is gone. Market participants are celebrating the arrival of spring by raising DOW over 10% in a week. As for me I remain pessimist about the state of the economy and the market should really just be a reflection of that in long term if not in short. Furthermore, there is too much sentiments on the wall street leading to irrational happenings. I don't understand it
For this reason I am continuing my efforts to take my money out of market. Considering the fact that I started investing in the greatest bull market, I have been able to go from 5% cash position to about 60% cash without realizing any net loss. This does not mean that my belief in value investing is shaken but the billion dollar question is when to re-enter the market?

Depression?

2009-02-28T13:27:00.001-08:00

We may or may not be in depression but it sure feels like it :)

Low hanging fruit

2008-12-17T20:49:00.000-08:00

Its been a long time since I have written on this blog. A lot has happened since I wrote the last time. These times have shaken the nerves of the most resolute investors. Losing 50% of your life savings in a matter of days is not easy to stomach. Most of the people I know have even stopped looking at their portfolios because its just too painful.

During this time, I shifted gear and traded actively. In this post I will not get in to details of how and what I have been trading but I will only say that I have been plucking some low hanging fruits. You see in past few months I lost a large part of my life savings because of stupidity of others so it was only fair that I got back at them and made up for my losses at their expense.

Talking about low hanging fruits, I must share with you the farewell letter of Andrew Lahde. Andrew was a hedge fund manager who dissolved his fund in September after betting against subprime and earning 1000% on his investment. His farewell letter is a very interesting read.
Andrew Lahde Farewell letter

I will quote the following word from his letter. These may be his words but the feelings are mine

"I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life."

Recession is here

2008-10-08T10:07:00.000-07:00

The love and respect I have for my job has increased 10 fold. If this is not recession, I don't know what is.

Bye Bye Schnoover

2008-09-22T21:55:00.000-07:00

Circuit city CEO Philip J Schnoover has finally resigned. Here is a guy who took a reasonably profitable company, a company that Jim Collins described as great in his book 'Good to great' and ran it to the ground. Under his stewardship share price plunged from 30$ to 1.7$.

While all this was happening the CEO had no idea why this was happening and what could be done to turn the company around. He tried desperately like a guy who is drowning and doesn't know how to swim. For example replacing the senior employees with high school kids to cut the cost is particularly a dark chapter in the history of Circuit city.

In a company if returns on assets is less than the cost of capital, it is not wise to buy more assets. Despite that CC kept on the opening more and more stores leading to bigger losses. One may argue that in retail the economy of scale matters a lot but you have to have some idea as to at what revenue target, you will break even. It seems that the more stores Circuit city opened, the more losses it reported.

The chances of Circuit city survival as an independent company are slim. Either it will be bought over by vulture investors(which seems more unlikely now since all the cash is squandered by the current management) or it will be bought by some other company that sees synergy with CC. The best scenario for the investors is that the new CEO will turn the company profitable or atleast break even hence making it more attractive to prospective buyers. This process will take long time. If you are patient and adventurous, you can either win 400% return in 1-2 years or lose it all.

We are all Keynesians now

2008-09-22T20:23:00.000-07:00

To resolve the financial crisis government announced an 800B rescue package. Although it was announced on Sep 18, I believe that secretary Paulson arrived at this conclusion on the same weekend when BAC announced the purchase of Merrill Lynch. This makes sense because to commit 50B in such turbululent times, BAC CEO Ken Lewis must have known something that others didn't.

Now that the government has proposed the package on the floor, democrats dominated congress is having second thoughts. CNN reported that a lot of tax payers are against this deal and want the financial institutions to reap what they sow. This does sound just but the cost of the justice will be huge. Think of it this way - you have been let down by both political parties but still you can't just wish them away. Similarly these financial institutions are necessary.

Coming from socialist India where banks were nationalised, I can tell you it was a great achievement and in some circles a mark of status to be able to open a bank account. This will give you the idea how hard it would have been to take loans. Just think how easy it was to take loans for houses, cars and education. The problem started when it became too easy to take loans. Despite all its flaws wall street has done an efficient job of capital allocation. And if these financial institutions are no more, our financial situation will be a bit like political situation in Somalia.

In this crisis situation, government must act boldly and it has to act quickly. Today is the day that comes a few times in a century when we are compelled to say "We are all Keynesians now".

Microsoft to buy back 40B worth of shares

2008-09-22T13:18:00.001-07:00

In my post Microsoft a Dhandho investment I made a point that Microsoft should aggressively buyback its shares.
"As for Microsoft, I believe this is an ideal time to repurchase their own shares and finance the yahoo deal with debt if they must."
Seems like such demands havent gone unheard. Microsoft has decided to buy 40B worth of shares. To fund this buyback they are taking debt, something this company has shied away for a long time. With Microsoft's earnings and low interest rate it is the easiest way to increase EPS and reward the shareholders.
Wall street apparently did not seem impressed by this news. Its a good news for all the investors who intend to buy Microsoft shares. It is the time.

The losers game

2008-09-20T10:17:00.000-07:00

Charles D. Ellis via SimoleonSense
The losers game is a celebrated paper by Charles D. Ellis on why money managers can not beat the market. The crux of the story is - know the game before you play the game. Its truly a great paper and a paper that will help you in many spheres of life than just investing.
Read it here- The Losers Game

Bank of America will cut dividend

2008-09-20T01:19:00.000-07:00

First of all, let me apologize for the hiatus. Lets just say that there were things that required my full time attention. Several extraordinary development have taken place in past few days. In this post I am going to discuss the purchase of Merill Lynch by Bank of America and its fall out on the BAC shareholders.

First of all, gobbling up Merill Lynch in a time when hell froze over on the wall street goes out to show the confidence Ken Lewis has in his company. Merill Lynch will prove strategically very important for Bank of America. Ken Lewis has dabbled with investment banking several times without success. After having his share of fun in investment banking, Ken Lewis washed his hands of it. Merill Lynch gives him the best chance ever to succeed in that area. This chance however comes with a price tag of 50B dollars. People everywhere are saying that Ken paid too much for MER when he could have picked MER for less than half that money in a day or two. Only time will tell how this deal will work for BAC but in short term this deal may have grave consequences for the shareholders who rely on the income generated by the dividends.

This deal is an all share deal. This means that BAC will have to issue a lot of shares, namely 33% of current outstanding shares to close the deal. This means that the dividend liability will increase by 33%. The payout ratio for BAC is over 100% as it is and is going to increase 33%. With capital ratio dwindling BAC can not afford to pay out money in dividends that is considerably more than the earnings. Unless they increase their earnings significantly in next few quarters, its only a matter of time when BAC cuts the dividend.

The smartest guy in the room

2008-07-23T19:34:00.000-07:00

The memory of Enron scandal has faded from our memories but the lessons learnt should be etched upon our minds. I recently happened to see the movie - "The smartest guy in the room", and I was astounded to know the extent of deception. Fortune named Enron as the "most innovative company" for 6 consecutive years which I actually agree with but for different reasons than mentioned by Fortune. The innovative ways in which Enron generated profits out of thin air and hid all the debt has no parallel. Saying goes that you can fool some people some of the time but not all people all the time but the fact that Enron managed to fool all the people for such a long time goes out to show how smart people at Enron were.

From my point of view one of the biggest tragedy was that a large number of Enron rank and file employees lost all their 401K savings because they kept all their money in Enron stock. And why wouldn't they when Enron stock price was raging like a mad bull. Among all this, what blows my mind away is the comments made by the Enron executives. Following are some of the comments made by the Ken Lay in employee meetings.
"Our stock price is doing really well. In another 12 to 18 months it will probably double again."
"Analysts have put a target price of 110-125 on our stock"
In one such meeting, a lady with sunny disposition chuckles -"We should put all our 401K in Enron shares." She continues while looking at Ken lay and Jeff Skilling -"Don't you guys agree?"

How can the chairman of the company make such remarks about the share price? This is why it is so important to do some investigation about the leadership of the company before investing in that company. Stock price is the price that you pay for the claim on the future earnings of that company. A stock price obsessed CEO will do unethical and sometimes illegal things to increase that while the intrinsic value of the company may suffer at the same time.

In my opinion the Enron tragedy was caused by the explosive mix of unbriddled ambition and extreme intelligence. Once again Warren Buffet puts it the best

"In evaluating people, you look for three qualities: integrity, intelligence, and energy. If you don't have the first, the other two will kill you."

Ken Heebner featured in fortune

2008-06-08T23:03:00.000-07:00

My readers will remember what a big fan I am of the mad genius Ken Heebner and his CGM focus fund. Fortune is celebrating him in their cover story this week.

America's hottest investor

Never mind the rocky market. After a string of supersmart calls, mutual fund manager Ken Heebner is putting up the best numbers of his sterling career.

Continue reading at.
http://money.cnn.com/2008/05/23/magazines/fortune/birger_americas_hottest_investor.fortune/index.htm

Microsoft a dhandho investment?

2008-05-06T09:55:00.001-07:00

As in politics, you can't have permanent friends or foes in business. Most of my readers would notice that I have been bearish on Microsoft shares in past few months but I am changing my opinion temporarily.

Stock market works in mysterious ways and I would beg to differ from my friends who believe in efficient market theory. Despite market increasingly becoming better in closing the gap of attractively priced securities, there is enough time for individual investor to take advantage of some of these mispriced equities. People who bought aapl around 120 or goog around 420 will know what I am talking about.

I believe that similar situation has presented itself in Microsoft shares. Microsoft has been doing really well for past few quarters and with some of the new initiatives doing well we believed that Microsoft share price is finally breaking out after being in pit for over five years. Then came Microsoft's unsolicited bid for Yahoo and things changed. Market did not like the idea of high valuation Microsoft put on Yahoo and responded with shaving off over 3$ from Microsoft's share price. Then in the last quarter despite beating the street expectations market punished Microsoft for not making enough money from Windows. Finally Microsoft withdrew its bid for yahoo. We expected that market will reward Microsoft's share price but it punished both Yahoo and Microsoft shares. This time they punished Microsoft because it could not close the deal. Analysts can't have it both ways. First punishing Microsoft for placing the bid and then withdrawing it.

With over 23 billion $ in its coffers and a forward P/E of 13, Microsoft seems to be mispriced. Even with a generous discount factor and cost of capital, Microsoft has a net present value. Microsoft at current level is what Mohnish Pabrai calls a dhandho investment, that has a lot of uncertainty and little risk. If Microsoft doesn’t revisit yahoo then the share has at least 3$ of value built in. If it does end up buying yahoo then too the market has priced Microsoft as if it will buy yahoo at 35$ a share with no value in return from this purchase. As for Microsoft, I believe this is an ideal time to repurchase their own shares and finance the yahoo deal with debt if they must.

Whats next for MicroHoo?

2008-04-30T23:12:00.000-07:00

Microsoft's deadline for Yahoo! has passed and the market is rife with speculation about the future of MicroHoo! In past few weeks Microsoft executives browbeating about walking away from the deal has made many analysts give as much as 60% chances of this deal not happening. This is what I think about the future of MicroHoo!

Microsoft will not go hostile with their current offer. With current offer that values Yahoo! at about 29.5$ per share, Microsoft is bound to lose the proxy war because even large investors such as Bill Miller have declared that they want the price raised. Raising the price and then go to proxy war seems totally stupid.

Microsoft will not walk away from this deal. Obviously Steve Ballmer has had his eyes on Yahoo! for some time now. They have determined Yahoo! is essential for Microsoft's future and a few billions is not worth betting company's future.

As Google eats the search share from Microsoft and Yahoo, time is of essence for Microsoft. Yahoo's value is going down for Microsoft as time is passing so they want this deal done fast. I will not be surprised if the deal is finalized in next couple of weeks at north of 35$ per share. When this deal is finalized the shares of both companies will rise but in long run, I would be highly bearish on Microsoft.

Why I will bet on Google over Microsoft

2008-03-23T22:13:00.000-07:00

In past few years, for Microsoft, Google has graduated from a minor irritation to a redoubtable competition that is threatening their very relevance. Now Microsoft is baying for Google's blood. They want to take the fight to Google's footstep and they believe that Yahoo! will be their Achilles.

Every year Warren Buffet auctions a lunch date with him for charity. Last year this date fetched almost half a million dollars. If Mr Buffet decide to do the same this year, I would suggest Steve Ballmer bids on it and wins it no matter what. Warren Buffet said -" If you give me 100 Billion dollars and tell me to take away the leadership position of coke, I will return the money. It cant be done." Similarly 5 years ago if you had asked Mr buffet the same question about Windows, he would have said the same thing. What applies for Coke and applied for Microsoft five years ago, applies for Google right now. No matter how much money you throw, you cant displace Google from search leadership position.

Businesses like Coke, Microsoft Windows, Google search can not be destroyed by competing on the same grounds. They are destroyed only when they are no longer relevant. Probably thats why Mr Buffet prefers companies like Coke over Microsoft or Google because no matter what OS you use or search engine you use, you will still be drinking Coke.

Despite the current slowdown in the earnings, I believe that Google is a great investment opportunity. Google detractors call it one trick pony but its no ordinary pony, its the unicorn. Internet is already such a big part of our lives and soon will become soon become as ubiquitous as air. Think about internet becoming so pervasive in countries like India and China and the magnitude of opportunity just blows my mind.

Another point to note is that Google probably has the highest concentration of software engineering talent. I know for first hand that some of the most talented people I knew at Microsoft are now working for Google. Is it a co-incidence that Google hired mostly the engineering talent of Microsoft and not the management talent. Microsoft upper management is mostly comprised of Microsoft veterans well entrenched in the Microsoft system and not so fit to survive in any other ecosystem. There seems to be severe talent crunch at Microsoft considering that it just slipped to 86th best place to work for, from 45th last year whereas Google remains numero uno. With its amazing software talent and Google's commitment to let employees work 20% of the time on their pet projects, its only a matter of time until Google finds alternative revenue sources. After all it took a long time for Microsoft to turn two trick pony from one trick pony.

An open letter to Michelle Obama

2008-03-21T10:30:00.000-07:00

I dont discuss my non-financial thoughts on this blog but in this case I will make an exception.

Dear Mrs. Obama,

First of all let me express the respect I have for Barack Obama and if I could vote, I would vote for him because I do believe that out of all the candidates he is the fittest to lead the country. However I do not expect any miracle because ultimately the destiny of a nation lies in the hands of its citizens and not in the hands of politicians. Now the point is whether Mr. Obama can motivate people to do that and this is the point I want to discuss in this letter.

Mrs. Obama, I really appreciate how you have supported Mr. Obama during his campaign but over the past few weeks some of your comments have disturbed me. Out of all the controversial comment you have made, none has disturbed me more than this one - "As a black man, Barack could get shot going to a gas station". I somehow find this comment racist. Now I don’t have any problem with someone being racist unless they are going to be the first lady of the country.

Before you make any assumptions about me, let me tell you where I am coming from. I am an immigrant to this country. My skin color is a lot closer to yours and Mr. Obama's than it is to, say Hillary Clinton's. I do not come from a privileged background and let me also tell you that in past eight years that I have spent in America, I have faced racism from people whose skin color filled the entire color spectrum. Despite that, I don’t think comments like "I could get shot at the gas station" represent the truth about America.

Mrs. Obama, I would like to ask you what year and place are you really living in that you think that a black man could get shot while getting the gas? Why does your comment remind me of someone whose comments were recently condemned by Mr. Obama. Pastor Jeremiah Wright Jr. was dismissed by Mr. Obama as someone who is still living in the past but what about you? It seems to me that when it comes to racism, your thoughts are not much different than those of Pastor Wright who believes that the black man is the victim of "US of KKK A". Now coming back to Mr. Obama, when two so important people in his life harbor such views how do I get convinced that he doesn’t. How do I know that he was honest about what he said in his speech about race relations in America. If he does become the president which seems more probable with each passing day, I really hope that his legacy is that of a great president instead of the first black president.

Mrs. Obama, If you are the first lady of the country, know that you will be the first lady of the entire country, not just that of "Black America". Let me conclude this letter with the immortal words of Mahatma Gandhi - before you bring "the change" to the country, you have to bring that change within yourself.

Vikas Agarwal

Building the nation since 2000, one byte at a time.

For the reference here is the video of Michelle making the controversial comment

http://www.youtube.com/watch?v=nyUsDOeFo24

Role of Management: The Warren Buffet Way

2008-02-24T09:14:00.000-08:00

Microsoft's latest investments(Facebook), acquisitions(aQuantive, Fast) and propositions for mergers(Yahoo!) inspired me to think about the role of management in public companies.
Managers and executive of a public company are paid by the shareholders of the company to provide the shareholder an expected rate of return on their investment. The best way to achieve this is to increase the intrinsic value of the company.

The Executives of a public company are usually paid the lions share of their compensation in the form of stock options. This was designed to make sure that the shareholders' interests are aligned with those of management's. Alas this form of compensation hasn't had the desired impact. With CEOs changing jobs frequently the only interest they have is in maximizing their compensation instead of increasing the intrinsic value of the companies.

There are three main criteria that Warren Buffet has applied in picking stocks.
1. Nature of Business: Buy a business that is so basic that it is not prone to technological disruption. Furthermore it should be so simple that even a bozo can run it because ultimately a bozo will in fact be running that company.
2. Margin of safety: Buy the business with adequate margin of safety. Although Warren Buffet does not apply this principle as strictly as Ben Graham has recommended.
3. Management: Warren Buffet likes to do business with people he likes. Beyond the fundamentals of the company, its the management that can make or break a company. Wrong moves taken by CEOs out of greed, ego or thrill have caused the titanic companies like Enron and Worldcom to sink. Enough has been said about the other two principles so In this post, I will concentrate on this topic.

My recommendation is that one should not buy the stocks of a company whose CEO you can not trust. How can you find whether you can or can not trust the CEO of the company, you may ask. I will give some of the examples and insight that I have learned from experience.

Stock buyback vs Stock Dividend
No other instrument has been abused as much as the stock buybacks. CEOs declare huge buybacks and the stock price takes off. In the mean time CEO dumps his stock options and the stock buy back never takes place. Would you be surprised to know that a large percentage of declared stock buy backs never take place? Can you trust such CEO? Furthermore sometimes the stock buybacks take place when the stock price of the company is way higher than the intrinsic value. But these actions increase the value of the stock options of the CEO. These actions erode the intrinsic value of the company in long term.

Stock dividend on the other hand are a better way to pay back to the stock holders. Since stock options holders do not benefit from the dividend as much they do from stock buyback, this is a better way to payback excess cash to the shareholders. Since qualified dividend are taxed at the capital gains tax rate, there is no huge tax hit. Furthermore, with cash in his pocket, the shareholders can buy the shares of any company they like, including the one that paid the dividend.

Capital Allocation
CEOs are not always blinded by the greed. Sometimes it is ego, legacy and the rush to make a big deal. Some of these factors cause them to make stupid acquisitions. The list of such acquisitions is endless. Nothing destroys the shareholders value faster than a trigger happy CEO on a buying spree on shareholders money.

Lets take an example that has bothered me a lot lately- Microsoft
After refusing to pay 3B to acquire double click, Microsoft thought it was a great idea to buy Aquantive for 6B. Then paying 2B for Norwegian search company Fast was also hailed by both Microsoft executives and analysts alike. The same microsoft that implied youtube acquisition for 1.6B was not a long term investment, somehow discovered that valuing facebook for 15B is a very smart move. And now their bid to buy Yahoo for 45B which could well cost them around 55B(considering the price raise, Yahoo employee severance package poison pill, Yahoo employee retention bonuses, Investment banks and legal fee) makes me wonder how are they going to get a reasonable rate of return.
Imagine Microsoft succeeds in buying Yahoo for 50B, to get 10% ROI Yahoo will have to generate 5B in profit, Aquantive will have to generate about 600M and Fast will have to chip in 200M. Thats almost 6B in profit per year. Currently they are creating less than 1B in profit. So unless Aquantive, Fast and Yahoo are just pieces of a jigsaw puzzle when combined create a very rosy picture, I cant help but wish good luck to Ballmer, Ozzie et al.

A great CEO should be a great allocator of the capital. Having said that I believe It is better to have a CEO who knows that he is not too bright and returns the excess cash in the form of dividend compared to the one who values himself much higher than his intrinsic value and destroys shareholders money to fulfill his whims.

When purchasing the stocks of a company, look for the signs above and try to fathom whether the management thinks like the owner of the company, whether management's actions are based on business sense or based on greed or ego. If you have found a CEO who cares about the company, you have got a winner.

Joe Rosenberg on Yahoo Microsoft merger

2008-02-05T11:02:00.000-08:00

Rosenberg, chief investment strategist at Loews Corp. is one of the most revered investment manager on the wall street. His views on Micro-Hoo! are very similar to mine. He points out
1. Microsoft can never get reasonable return on its yahoo investment
2. Increased competition will bring down the prices hence decreased margins, leading to even lower probability of getting a reasonable return.

Read it all at The Microsoft-Yahoo deal's bad numbers

Update:
This article is probably the sanest and the most rational article I have read on Microsoft's lust towards Yahoo!
http://www.alleyinsider.com/2008/02/dear-jerry-and-steve-heres-the-answer.html

Declaration of Divestment from Microsoft

2008-02-01T10:58:00.001-08:00

What happens when a loser marries another loser? We get a winner? No, we get a loser squared. Microsoft's bid to buy out Yahoo seems like a similar marriage. Yahoo has long demanded high valuation based on promise but while Google advanced and made online advertising a extremely lucrative business, Yahoo faltered. And lets not even talk about Microsoft, they have been increasing their loses at the rate Google has been increasing their profits.

"Advertising, Advertising, Advertising", was Steve Ballmer's war cry this year. He just seems too obsessed with Google. We all remember the unforgettable chair throwing and "I will f**** kill Google" incident. Is killing Google more important than creating shareholder value? With all the technical brain power and billions of dollars in war chest, this is the best Steve Ballmer could come up with? If they wanted to compete with Google, they should have spun off live group, not buy Yahoo. Whatever little profit Yahoo has been making in past would also evaporate once Yahoo is a part of Microsoft. By spinning off live, Microsoft would have given enough creative control to live and by the virtue of capitalism, Live would have been more successful alone then it is under Microsoft flagship. Microsoft claims they will save 1B per year on infrastructure alone but they did not mention the administrative costs of merging the companies. Once Yahoo is with Microsoft, they would start shoving Windows down Yahoo's throat and eventually killing it.

Microsoft is getting desperate and it is running out of options. Google is encroaching in to its desktop market slowly but should Microsoft spend 44B + billions more in merger cost to give Google a scare? Steve Ballmer can not leave Microsoft with the stigma of Google on his legacy. Hence Microsoft is ready to participate in this internecine war with Google. Right now online ad is highly lucrative because Google has no competition but if by one in a hundred chance Microhoo! Managed to put up a competition, they will only derive the prices down and Google's blue ocean will turn into a red one. Microsoft is playing by Google's rules on Google's turf instead of changing the rules or the turf.

As far as Google is concerned, the somber mood that this earning miss brought to Googlers, immediately changed into a cheerful one by Santa Ballmer. Some of my friends who work at Google called me up and made fun of Microsoft's desperation.Microsoft had live.com, msn.com and hotmail.com. Now Microsoft wants to add Yahoo.com to its eclectic dot com collection. Google must feel like Gulliver on the island of Lilliput.

The enormity of this stupidity can only be undone by a bigger stupidity and it should come from Yahoo! Shareholders by not accepting the offer. I am counting on it. In the end I am making the declaration of divestment. I can not remain invested in a company that has a leader with such disrespect for shareholder value. I will sell my Microsoft stocks. All of it.

Here is the letter that Steve Ballmer wrote to Yahoo! board. The language is oozing desperation

http://www.microsoft.com/presspass/press/2008/feb08/02-01CorpNewsPR.mspx

VMW revenues fall short. Stock tumbles

2008-01-28T18:46:00.001-08:00

Problem with the the stocks of the companies with extremely high expectations is that sometimes achieving success beyond expectations is just not good enough. This was the case with google when stock price tumbled despite google trouncing analysts' expectations. People who "missed" the google bus jumped on VMW thinking I am not going to miss this one. For these "investors" any price was justified because just like Google, VMW stock price was going to become six fold in several years.

VMW created more buzz than google but alas couldn't follow suit on earnings front. Just in the second quarter after IPO VMW fell short of expectations, let alone beat them with humongous margin. This is again a proof that VMW is not Google. Despite stock falling to $60 level, VMW is selling at 11 times the sales and over 100 P/E.

I am not going to analyze VMW in any more detail here but I would now point to almost prophetic article I wrote earlier about VMW.

buy-vmware-journey-into-investors-mind

Microsoft reports record earnings, raises outlook, market yawns

2008-01-25T10:09:00.000-08:00

Microsoft reported their earnings yesterday after market close. Net earnings increased by 79% . The revenues increased by 30%. They also raised the outlook for the rest of the year. The stock price does not budge. This was one of my biggest bets this year so far. Looks like msft will follow the market instead of leading it. Despite that, I remain bullish on microsoft and keep a target price of 40$.

Sears holding and Eddie lampert

2008-01-15T23:47:00.000-08:00

Eddie Lampert is considered the Warren Buffet of our generation. His purchase of KMart was considered a master stroke. Lately his performance has suffered a lot. Here is an article that provides a thorough analysis of what might be wrong with Sears

The Marriage from hell

The aftermath of CFC BAC deal

2008-01-14T21:31:00.000-08:00

So it is confirmed that Bank of America will buy country wide financial. The deal has some interesting aspects that I am going to discuss now.

1. Bank of America did not pay a significant premium for country wide financial. Wall street is very predictable when it comes to mergers and acquisitions. The rumor of BAC, CFC deal sent the CFC price soaring over 70% in the day. I published my post stating that BAC should not buy CFC and even if they do, at least not at such lofty premium. Further I made a short case for CFC. If you had shorted at that time you could have made cool 30% within hours :)

2. Bank of America has agreed to buy CFC at 4.1B US $. Currently with stock price 6.09, the market cap of country wide is about 3.52B. There is an arbitrage opportunity here. You can buy CFC stocks right now and wait for the merger to take place. The merger could take up to one year and by that time you could get a cool return of over 14% with only risk being that the deal may not go through. Considering the jubilation in both CFC and BAC camps, it is unlikely that any of these parties will balk at the deal. The deal will make Bank of America, mortgage giant in USA and considering the situation of financial institutions, government will not try to impede this acquisition.

3. Angelo Mozilo has made history. He will be a case study in business schools as a CEO who destroyed a company and walked away with 100 million dollars.

sell CFC now!!

2008-01-10T11:55:00.000-08:00

With rumors of BAC buying country wide financial(CFC), the stock price of CFC has taken wings. In todays morning session the stock price of CFC has increased over 70%. If CFC doesn't get capital infusion, it will most likely end up in bankruptcy because housing market is going to get worse. With Banks margins decreasing and money evaporating from securitization of loans, I believe the bank should be very careful with the money. In such stormy season capital is the best friend of the banks.
I dont think BAC should be buying CFC at current level because if it wants, it can buy it for even cheaper. Furthermore, buying CFC at 70% premium just seems unlikely to me. BAC has already invested 2B in CFC for 16% stake as preferred stocks. Losing another 4 to save these 2 is like throwing good money after bad money. I am not a fan of shorting stocks but if you are and agree with my thoughts, you may be able to make money by shorting CFC stock. Wall street has a tendency to go overboard when it comes to buy out rumor. In past we have seen Yahoo! price increasing by 30% over microsoft buyout rumor. Netflix increasing by a similar amount on Amazon.com buyout rumor. I advised my friends who held yahoo and nflx to sell their stocks on these rumors and those who followed my advice did well.
I would again say if you own CFC, get out now! this is your best chance.

ps:If BAC does indeed buy CFC at such high premium, then I would recommend that you sell BAC. I know I will.

Should you use stock options?

2008-01-09T21:44:00.000-08:00

Stock option is an instrument to invest in equity market with high leverage. If you are lucky an appreciation of 10% in the price of a stock can translate into over 100% appreciation using stock options. Despite such promise I find myself averse of investing using stock options. There are several reasons for this

1. Unlike stocks you cant hold stock options forever. Passage of time has detrimental impact on the value of stock option.
2. Most of the time premium of stock option is too high to make them attractive.
3. You do not get any dividends for the options of a dividend paying stock.
4. Last but not least, your gains using the stock options are taxed at ordinary income irrespective of the time you held that option.

If we can somehow blunt the sharpness of these disadvantages then stock options are a wonderful tool and I would use and recommend them wholeheartedly.

I am now going to discuss the cure for these disadvantages.
4) is rather easy to cure. Buy stock options in your tax sheltered account. You can move some of your stock positions or index funds to taxable account to make capital available for stock options trading.

3) is also easy to cure. Buy the stock options of the company that either does not pay dividend or has very low dividend yield. This way chances are that most of the cash that company generated is going back to grow future earnings hence increasing the chance of capital appreciation.

1) To cure this, only buy LEAPS(long term equity anticipation security). LEAPS are basically stock options that have two to two and half years of life span. Of course you can sell your options earlier but this long time span give you sufficient time for capital appreciation.

2) You cant really do anything about the premium of the stock option but what you can do is to chose the stocks options that have reasonable premium.

Lets put all these pieces together and let me tell you about an ideal candidate for reasonably safer stock options trading. The stock is Microsoft(msft). Microsoft is a very stable stock. despite the see-saw that market has played recently, Microsoft has stayed within 10% range. It is a company that produced the results last quarter that blew away analyst's prediction and is likely to continue the trend atleast in next couple of quarters. The dividend yield from Microsoft is only 1.3% so you will not lose a lot by not purchasing the underlying stock instead of the stock option. Besides all these points, the thing that makes microsoft option trading most attractive is the low premium on the LEAPS. Take Microsoft Jan 2010 20$ stock price call option(WMFAD.X). The price of this call is 14.80, bringing the stock price basis to 34.80. With msft stock price being 34.5, you are only paying 30c premium. This option provides you 2.3X leverage for almost no premium at all!!! Suppose Microsoft goes to 42 in next two year( a very likely possibility), you could make 54% profit with 27% average annual return that too with such low volatility.

Since Microsoft stock is my largest holding(thanks to my employment there), I intend to replace my stocks with msft LEAPS. Even after purchasing the same number of stock options and paying the capital gains tax, a significant part of the proceedings from my Microsoft stock sales will be available to deployed elsewhere while keeping all the benefits intact. If I find more stocks that fit the bill, I shall tell you.

Buffet is bullish on America

2008-01-06T22:50:00.001-08:00

One of the reason Mr Buffet is the greatest and the most successful investor of all time is that he does not follow others, instead he makes a path that others follow. Right now when all the investors are running scared from American economy, Mr Buffet has made his biggest purchase ever in what he calls one of the most basic American business. Here is the video of his interview.
Warren Buffet Interview

2007 the year that was

2008-01-04T11:35:00.001-08:00

My failed attempt to get into Stanford business school led me to explore alternative ways of getting into business. That’s when I discovered investing. I have been putting money in stocks before too but that was purely based on speculation. I would be lying if I say that all my investments are 100% free of speculation but in such cases margin of safety is your friend. Let me wind up year 2007 with a summary of some of recommendations and how they fared.

Bullish calls

BRKB: This was my strongest recommendation. I recommended this stock and purchased at 3500. The stock flirted with 5000 briefly before pulling back to 4600 after the Barron's sensational article.

COP: Bought at 56 and sold it at 82 in 8 months. Easiest money ever.

MSFT: Another strong recommendation from me. I recommended it to buy at 26-28. The stock went as high as 37. Before settling around 35.

BAC: Another very strong recommendation. I bought BAC at three different price levels with average price at 46. This did not go as well as I thought. I am still not bearish on BAC. With almost 6% dividend yield, Think of BAC as a 3 years CD with 7.5%(dividends are taxed at much lower tax rate) interest rate.

NFLX: Another strong recommendation. I asked readers to buy the stock when it fell to 16. I did a comparative analysis of netflix and blockbuster and concluded that nflx was a strong buy at 16$. Indeed stock rose to almost 30$ by year end.

EBAY: I recommended EBAY when it was trading at 32. It rose to 40 but receded to 32 after skype write off.

SLT: Bought it at 14$. Stock touched to 30$ before falling to 25$. Still a handsome profit.

AAPL: I wrote an article for seeking alpha making a long case for aapl at 152. I received lots of negative comments but with aapl at 200, numbers speak for themselves.

CC: This takes the hall of shame award. It has fallen more than 50% since I purchased it. But if you bought this along with other recommendation from me, you would still be sitting on a handsome profit.

HERO: This stock wavered around my recommendation price. Right now its 8% below my purchase price.

Bearish call
I am not a big fan of shorting stocks but I only made one bearish call this year. It was VMW. I wrote an article for seeking alpha on VMW. The comments both on seeking alpha and on my blog were not kind. "Investors" took my views as a personal attack on them and rewarded me with verbal abuses. I maintain my bearish call on VMW.

I would discuss my plan for 2008 in my next post.

Happy holidays

2007-12-29T00:32:00.000-08:00

First of all let me apologize for the light blogging and wish you all happy holidays.

Since the debacle of CC (I mentioned it in my earlier post) I haven't really purchased anything. With the sinking house sales and fears of recession, I am keeping cash in hand. Unlike money managers i don't have to be 100% invested in the market. This explains my hibernation.

So far I have mostly been analyzing securities based on their fundamentals but lately I am getting more interested in the macro economics conditions that lead to various economic cycles. I am planning to read Age of Turbulence by Alan Greenspan and Your financial edge by Paul McCully. As usual I will share my take from these books on this blog.

In the end I would like to wish you and your family and happy and prosperous new year.

Investor of the year

2007-12-12T15:45:00.001-08:00

Fool.com has nominated 5 investors for the investor of the year award
Bruce Berkowitz
Warren Buffet
Carl Icahn
Mohnish Pabrai
John Mauldin
I was surprised to see the omission of Ken Heebner from this list. Ken had a much better year than any of the investors above. I have been tracking him for several months now and looking at his stock picks, the single thought that comes to my mind is "Either this guy is the luckiest guy alive or plain genius". His fund CGMFX is up more than 77% this year. Having such astounding rate of return with the size of the portfolio that he manges is an extremely rare feat.
No matter who you vote for, my vote is sealed and it goes to the mad genius Ken Heebner.

On related note, my vote for the worst performance award among the famous investors goes to Bill Nygren. I think more than anything Bil just got extremely unlucky. Every major stock he picked just got hammered. Washington Mutual is the biggest drag on his performance this year.

Considering that this year was the year of growth stocks and value investors(in classical sense) suffered setback, I am thinking may be its a good time to move money from your growth funds to "value funds". For this reason Bill's fund OAKLX is in my list of consider to buy.

Subprime explained

2007-12-10T01:19:00.001-08:00

A good laugh is very good for health. Here is a humorous but very true account of subprime mess.

Value of stock dividends

2007-12-10T00:44:00.000-08:00

"I pick dividend stocks for a living, but even I was surprised to learn that according to Wharton professor Jeremy Siegel, from 1871 to 2003, only 3% of the market's return came from capital gains of the original investment. That means 97% came from reinvesting dividends! Dividend reinvestment is a beast you want to harness."

Continue reading at
http://www.gurufocus.com/forum/read.php?2,18575

PS: Like any other factor don't let dividend yield alone blind you. Buy a solid business that is increasing its income steadily and that is increasing dividends regularly. Reinvest that dividend and see that retirement coming closer to reality.

Cisco Sell-off Puts Apple at a Discount

2007-11-15T00:47:00.001-08:00

Among different asset classes wall street frequently makes difference between the growth and value investing. For me as an individual investor the difference between growth and value investing is irrelevant. For an investor to make money in a particular stock of a company, the company has to have growth. If the business of a company is not growing, you can not make money in that stock barring special situations such as arbitrage. Furthermore if you don’t purchase a growth company at the right price, chances are you that you will end losing money.

Based on the above observations we must look for a "growth at value" approach. It is easier said than done. If you use any stock screener to find companies with PE/G ratio less than 1, you will find that most of these companies have limited future outlook due to changed market conditions. Some of these companies may in fact turn out to be stars but if you buy the top 15 companies, you will still probably not beat the market. Considering the efficiency of the market, there is a reason that these companies are priced so low.

If it is so hard to beat the market then how do we get an edge over the market? You can perform at par with the market by just buying the index funds and for most of the individual investor this is probably the only way of making money in stock market. But sometimes in its manic or panic mode Mr Market provides us opportunities, if availed, can provide us an edge over the market. Lets take an example-

Last week Cisco gave its earning results and because of the weak guidelines there was a major sell of in tech sector. When a sector is going down everything that is deemed to be in this sector goes down. Consider the stock price movement of apple computers in last week. Apple computer is considered a large growth stock and it had a dream run in past couple of years. With a tag of growth stock comes the volatility. If NASDAQ fell about 8% last week, Apple computers fell about 25%. Lets analyze this situation Considering 190$ was the price market placed on apple computers about 7 days ago. Did the future prospects of Apple computer fall so much by Cisco outlook that apple deserved a fall of 25%? First of all it is hard to find a strong correlation between Cisco business and apple business so Cisco earnings should not affect apple business. Even if we can see that there is a direct correlation of Cisco and Apple business, does apple deserve to have its PEG ratio contracted far more than that of Cisco?

If you believed in Apple's price at 190, 7 days ago then you should really be thanking Mr Market for selling apple at 151$. If you took advantage of this anomaly and transferred some of your money from index funds to apple stocks, you will beat the market!

VMW overvalued?

2007-11-14T00:17:00.000-08:00

Right now if you search VMW overvalued in google, the top link will come to my post that appeared in seekingalpha.com.
http://www.google.com/search?hl=en&client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial&hs=51X&q=vmw+overvalued&btnG=Search

As you may have noticed that my post on vmw not only provoked attacks on my thought but also on me personally. I can understand that people who bought vmw at 120 with the hope(probably after reading on google forum) that vmw will hit 150 by dec and 200 by jan have reasons to feel offended.
The exact point of my post was to bring home the point that one should treat investment as a non emotional activity. Fear and hope are the biggest enemies of an investor. Instead of extracting the lesson from my post some readers thought that I was attacking their personal conviction about the prospects of VMW. The purpose of this blog is to share my thoughts on investing as I learn more about this fascinating activity. Why I find investing so fascinating is a matter of a long post that I intend to write some day.

Recent activities

2007-11-06T21:53:00.000-08:00

First of all, let me apologize for such a long absence. This absence was partly due to the work load at my job and partly due to the writers block.
Last month, stock market has behaved in a manner that has totally baffled me. I will be the first person to tell you that you can not time the market and market can behave in such contrast to your strongest beliefs that it may surprise you more than the best suspense thriller you ever watched. Having said that if you want to beat the market, you need to take a stand against the market in the equities you consider overvalued or undervalued. Following is the summary of the bets I took last quarter.

1. BRKB: This is the safest bet I made. Since its purchase about 3 months ago BRKB has risen almost 30%. The only regret I have is not buying more of it.

2. BAC: Bank of America was not wounded like its peers by subprime mess. My stand here proved right but unfortunately BAC's earnings shrunk due to loss in the investment banking operations. Furthermore the Citibank mess has brought the entire sector down. I am down about 10% in BAC. My conviction tells me to buy more of it at current price but then I am a little scared about the whole citibank thing, the impact it may have on other financial companies and how deep this rabbit hole is. I will still place my order to buy more BAC at 43.5.

3. HERO: HERO is a shallow driller. Main reason for buying this stock was strong balance sheet, low valuation and immense insider purchases. The management of the company also seemed shareholders friendly. I bought it about a month ago and its up about 6% since then.

4. SLT: I wanted to buy a copper company. The contenders were PCU or SLT. SLT was suggested to me by my friend and also by my father in India. Considering the low valueation of SLT and high expected growth, I chose SLT. The results have been pretty fabulous. I am up about 70% in past 3 months.

5. CC: Circuit city. What tempted me to Circuit city was its strong balance sheet, low P/B and low valuation. Entire CC for 1.4B, out of which over 300M is cash. Although CC is in loss right now but a small turn around could do wonders for this stock. Obviously things dont work the way we expect them to. I have this growing realization that this was a bad bet. Reading about the steps taken by management to improve margins and revenues, I am getting more and more convinced that CC is the new Radio shack. I am down about 10% since I bought this. I am almost ashamed to have bought this stock and I will sell it within this year. Circuit city can turn around and become a profitable company again but I am afraid that I just dont have that confidence in the management of the company.

6. MSFT: The crown jewel. This one bet is the reason that I am not hiding my face behind my knees considering the debacle of CC. Msft is my largest holding because of two reasons 1) I still have not sold my ESPP stocks obtained during my employment with Microsoft. 2) I bought considerable number of msft when stock fell to 22 last year. Most of my friends who work at microsoft wanted to sell their stocks before the earnings about 30,31. I was betting on record earnings from Microsoft this quarter because of several reasons - 1) Revenues from abroad will have a lot of positive impact the earnings due to falling dollar. 2) Intel gave outstanding earnings . That meant lot of Vista sale. 3)Halo 3 and Xbox also added to feel good factor.
I tried to stop my friends from selling Microsoft but some of them listened to me and some didnt.

What are my plans for the near future? None. I am totally baffled by the market. I dont really know what to do. I want to buy shares of some companies but they cost more than i would like to pay. For now I will just put my cash in FBALX or BAC and wait for an opportune moment to buy because if you want to beat the market, you need to take a stand.

Buy VMWare? A journey into "investors" mind

2007-09-27T22:03:00.000-07:00

What we do not understand we fear. This phenomenon applies to stocks with many "investors". People who will spend two hours deciding which shower curtain is the best value for money will buy a hot stock at the drop of the hat.

Yesterday a friend of mine asked me whether he should buy VM Ware. My answer was an obvious no. He bought VMWare at 84 anyways. I told him if he wanted to buy VMW then why did he even ask me. I then asked him his reasons to buy VMW. Here is the list of his reasons-
1. All his friends bought this stock at 56 and he doesnt want to be left behind. Talk about peer pressure.
2. When told that VM Ware is overvalued, he parroted out "People said the same thing about Google"(He gave me a similar bizzare logic when I tried to stop him from participating in a ponzi scheme).

With investors like this in abundance, no wonder VMWare a company that could raise its earning to 100 Mil after 10 years of operation is currently valued at 31B. I will now tell you the reasons that I gave him why VMW is overvalued.

1. current earnings are 100M a year. The earnings rose about 125%. so if we assume that VMW raises its earnings 100% for next 5 years and then 50% for another 5 years before being a victim of technology disruption. To make the calculation simpler and to show the ridiculousness of the valuation of VMW, even if we discard the discount factor, the sum of all the earnings based on the growth rate mentioned above comes out to be about 31B. That is equal to current market valuation of the company. If we take discount factor into account the value will come out to less than 25B. Considering this, do you think there is any chance of this stock increasing further. Sure enthusiasms of public may raise it in short term but like Ben Graham said - "Stock market is voting machine in short term and weighing machine in long term". This stock is bound to come down.

2. People are buying VMW like there is no competition to this. Microsoft has very strong product in the same technology area and if the virtualization sector really has as much meat as we are made to believe, then do you think Microsoft will not use its billions and its dominance in OS market to destroy the competition. Google may have caught Microsoft napping but VMW does not even have that luxury. This argument takes care of "people said the same thing about Google" logic.

The main idea is that what we dont understand, we fear and this fear is the biggest enemy of an investor. This fear stops us from doing thorough analysis of the securities we buy. The moral of the story is - If you love your money, dont buy the stocks of a company whose business you dont understand. Find out what company does, what is the market for its product, how is the management, how are its books( No one would have believed that corporate accounting will be the most most inventive industry in 21st century) and is the market valuation right.

The Peter Lynch Way

2007-09-22T19:56:00.000-07:00

Peter Lynch said Invest in what you know. Recently my experience proved the case made by the legendary stock picker. It was year 2005 and my wife suggested that we go to Chipotle mexican grill for food. Apparently she ate there during her trip to DC and became a fan ever since. I tried to find a chipotle near my house and found one in downtown.

At Chipotle, there were more than 30 people before us in line. How can people be so crazy for a burrito when there are several other places that sell burrito and have no line for food whatsoever. Anyways we liked the food there and as an icing on cake we got Jumba juice from the shop next door. Since then whenever we went to Chipotle, we had great experience.

Yesterday night when I was thinking about "Invest in what you own", the thought of Chipotle invariably crept in my mind and I looked for it on Wikipedia. I got the ticker symbol for Chipotle- CMG. I then looked at the graph of CMG on Yahoo finance. CMG opened at 44 in 2005 and today it is 112. The stock has already been up almost three times. If I were so interested in stocks I would definitely had bought CMG. Right now its been covered by several analysts and is owned heavily by institutional investors so the stock has been discovered. So I will wait for this stock to go out of favor and then buy it.

Question from a reader

2007-09-22T17:43:00.000-07:00

Recently a reader asked me this question
"Another question UNH and SNY are trading low, lower than what Warren Buffet got it for. What is your opinion on those companies. Why is the market not looking at them."

There are several reasons for this. First you must understand what market means today. Most of the stocks are owned by institutional investors. The impact of individual investors is at best minimal. Second you should understand the difference between Warren Buffet and the fund managers. The goal of Warren Buffet is to increase the intrinsic value of Birkshire Hathaway in long term. In words of Mohnish Pabrai - Birkshire Hathaway is a very inefficient investment vehicle because it has to pay corporate tax on all the earnings made via investment compared to capital gains tax paid via investing in funds. This fact imposes a very strict condition on what Warren Buffet invests in as the chairman of BH. What buffet may buy as an individual investor may not make sense for Buffet as chairman of BH. Due to this tax condition the stocks that Warren Buffet as BH chairman buys have a very long investment horizon. In words of Warren Buffet -"Our favorite holding time is forever"

The fund managers on the other hands have their performance evaluated every quarter. Many such managers are recycled for a bad quarter. So they can not afford to have the same investment time horizon as Warren Buffet. So What Warren Buffet sees in a company may not appeal to the fund managers with such short sight. For example Warren Buffet is buying the railroad stocks ravenously and people keep speculating why is he doing that but nobody knows except Mr Buffet the real reason for making such big investment in railroad companies and when they do, you can be sure that market will reflect that into the price.

Talking of that I would like to comment on BRK(Birkshire Hathaway symbol). Have you noticed that these days it is moving in opposite direction of the market. According to Mohnish Pabrai BRKB is selling at about 45% discount(although I have BRKB but I do not share his views). So this means that market in general is discarding the principles taught to us by Graham and Buffet explaining further why some of Buffet's purchases are lying in dust right now.

Roads to riches

2007-08-28T00:04:00.000-07:00

There is a saying on the street-"Good companies are bad stocks and bad companies may be good stocks". Companies like Microsoft, IBM, GE that have a very good track record and are very consistent are not really a good buy unless of course some news or economic condition bring them out of favor. This happen so rarely that you cant really wait on the hoard of cash till this happen. Then how do we make money?

In a particular sectors different companies are priced very efficiently. For example if company A grows at X% and company B grows at Y% consistently then you should make equal amount of money whether you invest in A or in B.

The key to making big money is to invest in the sectors that wall street has a very pessimistic view of. Consider aviation sector after 9/11. The stocks of airlines and plane makers were so cheap as if people will stop flying altogether. Those who had the courage to put money in aviation sector in sep-oct 2000 made big money. These people did not give into the mass hysteria but used their head to realize that people are going to fly and the industry will bounce right back. It was as safe a bet as could be.

Similarly the finance sector is in tatters right now. Street is treating finance stocks as if world will stop lending or borrowing money. This is the time to invest in finance stocks if you want to make money. Remember as long as street is alive so would the finance companies. Shares of WM, BAC, C are trading at P/E of 10. The dividend yield has risen upto 6% in some of these stocks. No wonder Bill Nygren has loaded up his select fund with WM and Buffet bought a lot of BAC. Bank of America invested 2B in CFC. The momentum is set for the finance sector, when you buy will make a lot of difference to the bottom line.

My experience with value investing

2007-08-19T00:22:00.000-07:00

Proponents of efficient market theory say that a monkey can do better in picking stocks than most of the fund managers but that doesn't stop from these managers from picking stocks actively. I think there is no harm in picking stocks but what hurts the performance is picking and selling very frequently.
In my investment portfolio, I keep most of my money in different diversified funds and rest of the money I use to pick stocks. The performance of the part that I invested in individual stocks has trounced the performance of funds with very less volatility. My strategy has been to keep most of the money in money market funds that gives me 5.5% return. I usually make one or two trade per year and that just does wonder for me. For example last year when Microsoft fell to 22, I said to hell with EMT and committed all my unallocated money to msft. My purchase remained in green for over 90% of the time and gave me almost 40% within 6 months. After I sold msft I put the money back in money market fund and waited like a hawk. This time when COP fell to 56, I again commited all my unallocated funds to COP. After about 7-8 months i sold them all at 81.2. Again an approximate performance of 40%. You must be wondering that I would pay short term taxes on that money. Actually I pay no taxes on that money because I use Roth IRA money to make these trades.
I have three types of accounts
1. 401K: I usually do not touch this. I only do some exchanges when I need to rebalance the portfolio or the economic conditions render some of the investment options useless. For example in 2002 I transferred most of my 401K money in bonds and that year bonds did much better than stocks. Then in 2004 end I transferred a significant sum to international funds. By 2006 I exited bond funds completely and moved everything to stocks. Needless to say that bonds performed very poorly in past couple of years. Apart from that I let the dollar cost averaging and compounding do their thing.

2. Roth IRA: I do all my experiments in this account. I do not have a lot of money in Roth IRA so this money is my value investing lab. All the trades I mentioned above were made in my Roth IRA account. The best thing is that almost all the gains I have made in my roth IRA were short term gains and since I do not pay any tax on that, it works great!

3. Taxable account: I need to reduce my tax liability as much as possible in this case. The biggest enemy of your investment is tax. I tend to buy the stocks that i want to keep really long terms. I bought all my BRKB in my taxable account because I tend to keep these stocks for several years. So for these years my money will increase without any tax penalty. I also bought BAC in my taxable account. Although BAC provides high dividend yield but since this dividend is going to be qualified, I will only pay 15% tax on this compared to 30% on savings account or bond funds.

I hope that these ideas help you design your portfolio better. If you have any questions feel free to write them in the comments.

Buffet buys BAC too

2007-08-15T00:41:00.000-07:00

In my previous post I mentioned that I am buying BAC. It seems that Mr Buffet also started buying BAC around the same time. This recent article mentions his latest trades. He now owns about 8.7 million BAC shares at the cost of around 440 million US$. Thats about 1% of BRK's total cash. Since I got affirmation from my guru, should I purchase more BAC?

PS:To further assert that this is a good bet let me tell you that in last month three insiders have purchased BAC stock. This is a typical case of value investing.

PS:George Soros is also buying BAC. So that makes three gurus purchasing this stock.

The Dhandho Investor

2007-08-14T20:02:00.000-07:00

I just finished reading the dhandho investor by Mohnish Pabrai. Mohnish will agree with me what I am going to say next. The book mostly asserts what Warren Buffet and Charlie Munger have been saying for years. There are only a few things that Mohnish tries to explain using different analogies and anecdotes. Here they are as I understood them-

1. Buy the simple business that is not a target of technological disruptions. A business that changes little with time. According to Warren Buffet "Change is the enemy of investment."

2. Buy a business with a strong moat. A business that will fend off competition for a considerable amount of time.

3. Buy this business at a discount. Business are like people and go through ups and downs in life. When they are in down cycle, the street will leave it like a sinking ship. According to Buffet "When people are fearful we are greedy" so that’s the time to buy this share.

4. Bet heavily on such opportunities. Buffet put 40% of the funds of Burkshire partnership in Amex during the salad oil crisis. Be prepared to bet heavily when you get a dollar for 25 cents. This opportunity may arise in situations where there is high uncertainty about the future of the business. Since margin of safety is so wide that this venture becomes a very low risk one. This is what Mohnish described as the low risk and high uncertainty venture.

5. Last and probably the most important lesson is "Be patient". If odds are not lined in your favor then do not bet because if you are patient you will get an opportunities where odds are heavily in your favor.

netflix vs blockbuster part deux

2007-08-08T22:26:00.000-07:00

I am continuing the discussion that I started about movie rental business. I am a big movie buff. Despite my busy schedule I watch about 6-7 movies a week. Mostly I get movies from my library or I buy the DVDs but recently I got the trial membership of netflix. This led me to explore the movie rental business in detail.

In my last post I mentioned the movie download rental will dominate in near future but due to the archaic policies of movie studios the movie download is still not as cheap as getting the DVDs. Yes it does sound bizarre but this is how things are now. Till studios understand the online business better and some company creates a revolutionary product that merges TV and Computer, DVDs and its variants will remain the dominant method of video rental.

I have tried video download service from three companies - 1)Movielink 2) Amazon.com 3) Netflix. In my experience netflix services beats movielink and Amazon.com hands down. Netflix has started this service that if you can watch movies online as part of your rental membership. Thats netflix "total access" for you. Although you dont find the latest movies online but still netflix's watch instantly feature complements the delay between receiving movies.

Competition is hot so how can blockbuster be left behind. They recently bought movielink for 50 million$. 50 million will give blockbuster the brandname, collection of movies and technology. Movielink has been in business for quite a while now and has probably been a losing venture. It was started by the movie studios but again movie studios failed to understand the business and despite having a great head start they couldnt make any headway. The worst part of movie link is their technology. Talk to the early adopters of the service and they will tell you how difficult it was to watch a movie using movielink.

To conclude I must commend the efforts and intentions of blockbuster but their actions leave a lot desired. They are going to remain a run also till they bleed to death. Dear readers if you still hold Blockbuster stock, I would suggest you shrug off all the emotions and re-consider your decision of holding the stock. In the mean time I will continue waiting for netflix to fall some more so that I can buy some at decent margin of safety.

Netflix vs Blockbuster

2007-08-05T00:11:00.000-07:00

Movie renters never had it so good. Gone are the days when blockbuster and hollywood video charged the dreaded late fee. I still vividly remember feeling so bad when I had to shell out the exorbitant late fee for a DVD. I could have bought the used DVD for that movie for the amount I spent on renting it.

Then netflix came along and changed the rules of movie renting. Netflix became one of the hallmark of web 2.0 companies and also became the darling of the wall street in the process. Blockbuster suffered lackluster sales and just couldnt figure out how to compete with netflix.
Round 1
NetFlix 1 Blockbuster 0

Blockbuster wasnt going to give up what it tought was rightfully its own. Hence blockbuster also started its own online movie rental service along with its stores. Margins for blockbuster shrank but this move prevented blockbuster from becoming irrelevant.
Round 2
Netflix 1 Blockbuster 1

By this time it was clear that it was going to be the fight to death. The last man standing wins. Netflix had matrued by this time and it turned profitable. Wall street welcomed the move and rewarded the share holders. Blockbuster online service wasnt really gaining much ground against the netflix because netflix had wider collection and better network hence faster quick around time. By this time someone at blockbuster invented what they tought would be the silver bullet. This bullet is called "Total Access". Total access showed quick results and for the first time netflix reported a loss in the number of subscribers.
Round 3
Netflix 1 Blockbuster 2

So who will win this war? Lets look at some numbers
For netflix
Total Cash (mrq): 377.95M
Total Debt (mrq): 0

For blockbuster
Total Cash (mrq): 182.30M
Total Debt (mrq): 921.10M

As you can see Netflix is on a much more firm ground than blockbuster. Furthermore netflix is profitable while blockbuster is not so the cash difference between these companies will only increase. If this is the fight to death war then netflix certainly has better probability of survival.

Furthermore I am convinced that the future of movie rental is online download and netflix has already started working on that. As far as Blockbuster is concerned unless it can change the rules of the game and convert its store from liability to asset, it is bound to join the dinosaurs in the process of evolution and purchasing blockbuster shares will be a lost cause.

After killing blockbuster, netflix will have to compete with Amazon.com Unbox, Apple iMovies and movielink to stay in business. Lets see what unique value proposition netflix can come up vis a vis these big players to stay relevant. But I think there is still some time till online movie rental will become as cheap and as ubiquitous as mail order movie rental so I am pretty sure that there will be a short window when netflix will rule and mint a lot of money. The amount of money it will make will depend upon how fast it can kill blockbuster.

Based on this analysis I intend to buy netflix around 15 for a short term(for about 12-18 months). This is not a foolproof investment but I believe that the rewards can be mouthwatering.

10 Questions to Mohnish Pabrai

2007-08-02T21:15:00.000-07:00

Among the Warren Buffets of this generation, one name has gained prominence like no other. His name is Mohnish Pabrai. Mr Pabrai is said to adhere to Ben Graham school of investing even more strictly than Mr Graham's most celebrated student.

Being a great fan of Mr Buffet, it should come as no surprise that my respect for Mr Pabrai has increased a lot especially after getting a peek inside his mind. You too can get a peek inside his mind. Here is Mr Pabrai answering 10 questions from Guru focus users.

10 Questions to Mohnish Pabrai

Bank of America Corp

2007-07-24T20:20:00.000-07:00

Is it the beginning of the end? Is the market going to recede after what we saw today? If this had happened 6 months ago I would have said no way but at this moment I don't know. There was a certain nervousness amongst the investor that led to this sell off.

DJIA that has been growing like the libido of a 15 years old finally showed signs of slowing down. That does not mean that this is not a time to invest. Today I bought some Bank of America(BAC) shares among opposition from my fellow investors. My idea for Bank of America is clear - it is a good substitute of putting money in the bank. The dividend yield is 4.5 which after 15% qualified dividend tax is much better(.6% to be precise) than 5% interest rate from bank with 32% income tax. Yes I am paying for this rate by assuming greater risk but then again yield is not the only reward one can expect by purchasing a stock like BAC. Lets crunch some numbers for BAC
P/E ~ 10
This means one can expect 10% return from this stock. Almost 5% of this is returned in the form of dividend. Now lets hope BAC's management is deploying this remaining 5% to earn atleast 5%(they could do that by simply purchasing US treasury notes). Lets hope the management justifies its salary by returning at least 10%(that they can do by simply buying back their own stocks). Hence 5% becomes 5.5%. This means that one can conservatively estimate the earnings to rise at the rate of 5%.
Now lets assume that inflation rate remains around 5%. So by purchasing BAC you can expect almost 10% real rate of return with considerably less risk than other fancy stocks. I agree this will not make you rich overnight but if you can assume a little more risk than the savings account then it is a much better place to park your money.

Alert: BAC just raised quarterly dividend by 14% to 64c/share. With current stock price the dividend yield of BAC is in tune of 5.4%. Your savings account has to give you 6.75% interest rate in order to match that!

PS: If you see BAC on gurufocus, you will see that David Dreman has been adding considerably to his BAC holdings.

Letters of Warren Buffet

2007-07-18T10:44:00.001-07:00

People call Mr Buffet as the greatest investor to ever walk on this earth but really Mr Buffet is a businessman more than anything else. Each year Mr Buffet sends out a letter to the share holders discussing the state of the company and that of the economy. He provides explanations of some of his decisions and provides some hints on what he might do, without going in too much detail. In one of his letters he said - ofcourse I can tell you what stocks I am planning on buying but then I will have to kill you.
The letters that Mr Buffet sends out have so much business wisdom in them that I am almost tempted to rename him from oracle of Omaha to sage of Omaha. The best part of his letters is his sense of humor. His letters are full of funny and intelligent jokes that make these letters fun to read.

So without much ado I give you the link to all his letters to the shareholders -
http://www.berkshirehathaway.com/letters/letters.html

Lawrence A. Cunningham compiled these letters and categorized them based on topics and came up with this book. I read the book first and the book intrigued me to read the letters of mr Buffet.

Update

2007-07-05T09:46:00.000-07:00

First I would like to apologize for the light blogging. I am sure you will forgive me once I tell you my reason for my absence. Dear readers, I just moved in the new house that I bought 2 weeks ago. The move is always quite a hassle so I hope you would understand.

Some might ask, why did I buy a house at the housing market peak. Within days of my buying this house the house sale has gone down really fast. I had my reasons to buy the house and investment probably comes at the bottom of the list of those reasons. The more I live in the house the more I realize that if you are going to live in the house then don't think of it as a financial investment. It is however an investment in your quality of life. Someday I will write a long post on my thoughts on real estate.

Coming back to the stock market, here is a list of some of the trades I made in last couple of weeks.

1) I followed my rcommendations and bought BRKB at 3550 last week. I could have waited longer for it to fall further but I am going to keep this for several years so it didn't matter.

2) I sold some of my msft stocks at 31 that I got at 22 last year. I would probably re enter at around 26.

3) I sold COP at 81.12 that I bought at 56 about 6 months ago. I plan to re-enter at 77.

The China itch

2007-06-25T10:15:00.000-07:00

US online sector has grown at a phenomenal pace and is now worth several hundred billion dollars. Wall street believes that China will follow the same pattern because, hey China has fastest growth in computers and internet connection, at least in terms of absolute numbers.

This perception shows in the way street treats the US internet companies trying to make their presence felt in China. For example recently when Amazon.com changed the name of their china subsidiary from Joyo to Joyo Amazon.com, wall street lauded this and increased the market cap of Amazon.com by 800 million $(stock price increased 2$). Recently when Ebay announced its expansion plans in China, wall street again rewarded the stock by increasing the market cap of Ebay by over a billion dollars.

This generosity of the wall street does not seem well reasoned to me. I believe it will take a long time for Ebay or Amazon to make billion dollar profit in China market so the prices of these stocks are bound to recede. I would even go ahead and call them a short candidate till their prices return to normal.

Guru Focus

2007-06-21T10:02:00.001-07:00

Check out http://www.gurufocus.com/ The site provides information on the stock holdings of some of the most revered investment gurus of our time. This site is useful in so many ways. If you are an active stock picker or if you just like to analyze securities, there is plenty to intrigue all of you.

For stock pickers there are thousands of stocks to choose from. You can use stock filters to find stocks or/and you can analyze the securities purchased by these gurus and see if they fit your investment philosophy.

This site helped me find Conoco Phillips(COP). COP was bought by Warren Buffet at an average price of 61. I only found that out when COP stock price was in mid 70s. So I just kept this stock in my watch list and bought it when the stock price fell to 56. I Finally I sold it for 81 at over 40% profit in 6 months.

My recommendations

2007-06-19T00:32:00.001-07:00

I am a technology guy and this is what I understand the best. Technology is what I follow the most so naturally the stocks that I will recommend will mostly be technology stocks. Here are some of the stocks that I am thinking of buying in coming few months.

1. Ebay- Ebay has a very strong moat. With its troika of marketplace, Paypal and Skype, it is set to remain a dominant player in web industry. For long EBay has been minting money because of this moat without innovating a lot. As the competition from Google increases we will see a lot more innovation from Ebay. Paypal is all set to become a bank in Europe. If things go its way then it may even become future of the banking industry. The P2P model of paypal can bring breakthrough changes in the personal finance. Even a die hard fan of Ebay like me feels that Ebay paid a lot for skype. This information already reflects in the stock price. Despite great performance by Ebay in last two years the stock has languished. This is despite the fact that Ebay has been buying its stocks regularly. I am very bullish on Ebay. For me a good entry point will be 24-30$. For short term traders buying ebay in next one month for around 30 will give a very good opportunity to make about 15-20% profit in 1-2 months.

MSFT- I think msft will soon break the ceiling that has kept the investors away from it. Microsoft is committed to take the internet war to Google's doorstep. I do realize that Google is a very innovative company but what has worked for Google so far is not bound to work for them in future considering their increasing size. Good entry point for Microsoft will be around 26$.

BRK.B- I would have preferred to buy BRK-A but unfortunately I am not ricch enough to buy even 1/4th of a BRK-A so I will have to be content with BRK-B. I know that BRK-B has languished this year but that is in line with the philosophy of Warren Buffet - When Market is euphoric, we are scared and when the market is scared we are euphoric. Personally I am very scared of the market right now so my philosophy is in line with theirs. My interest in BRK-B is very long term. I would not want to sell their stocks. There are several reasons behind that.
1. It will follow rule number 1 with higher probability. For those who dont know what rule number 1 is here it is in the words of the oracle of Omaha - Dont lose the money.
2. They dont give dividends. Their philosophy is to increase the intrinsic value of the organization. Although this should be the goal of every CEO but noone follows it better than mr Buffet. I believe the biggest killer of your net worth is tax. If I hold these stocks indefinitely then it is the best thing I can do for my net worth.

And so it did

2007-04-16T20:57:00.000-07:00

In my previous post I wrote that market will bounce right back after a huge drop and so it did. Look at DJIA, NASDAQ and S&P 500, they are all almost at the same level as they were on 27th Feb.

Bloodbath on the street

2007-02-28T00:05:00.000-08:00

Today US stock market underwent a correction and Dow shed 3.3%, Nasdaq shed 3.8% and S&P shed about 3.6%. That is a lot of drop for one day. Every stock that I own or aspire to own was in red. I sold almost all my stock holdings except microsoft couple of days ago. Timing could not have been better but I just got lucky. Anyways coming back to this correction, I dont believe that we are entering a bear market. I feel that market will bounce back pretty soon. There is just so much cash everywhere. Probably excess cash is one of the reason for astronomical rise in real estate because real estate is limited resource unless ofcourse we start colonizing moon. There seems to be a race to capture as much land as possible. Now people arent purchasing real estate that much, atleast in USA then that money has to go somewhere. I believe it is going to stock market.

Supply vs Demand

2007-02-27T23:45:00.000-08:00

I finally finished reading the the book The only three questions that count. I learnt many stock market concepts that were new to me. The best reason I liked the book was that it made me think and changed the way I look at deals. Ken explains many strategies that he used over the years. Believing that stock market is highly efficient, one probably can not use the strategies that explains in the book. But in this book he goes beyond explaining some strategies but encourages you to create your own based on the framework of three questions he has put forth. It is one of the better investment books I have read and I would grade it first rate. This book transcends the national borders and is as applicable in USA as it is in UK or Germany.
Now coming to how the book changed my perspective towards not just stock market but any market. It retaught me the concept of supply and demand. Whenever you want to buy something always ask yourself whether the price of that thing actually reflects the demand of the product? If the product is for investment then also consider the demand of that product when you sell that product. If you are thinking of purchasing a house, one of the biggest investments that you will ever make, give a little thought to the supply and demand rule.

The great humiliator

2007-02-24T01:57:00.000-08:00

I am reading a book by Ken Fisher. In the third chapter he touches the surface of behavioral finance. He says people are not driven by greed and fear in stock market but by pride and regret. Coming to think of this topic, all the things he talks about, I have experienced them first hand.

1. I started putting money in stocks in 2000. I put 1700$ in EXDS, then the darling of the wall street. My rationale for purchasing that stock was that price had come down a lot and it had to finally reach the level I am used to seeing. From the next day price started falling. There were warning signs all over the media but I held on to the stock because I wanted to break even. Every morning I would wake up and see the stock price and curse myself for having bought it. But I did not sell it. Finally after one month the company filed for bankruptcy.

2. I bought COP for very cheap. My rationale were thees -
1. Warren Buffet is accumulating COP.
2. P/E is very low.
3. Gas prices will rise further.
I made 45% gains on COP. I bragged my success in front of my friends and family. I did not do much analysis of the stock but I just purchased it. There was nothing great I did that I should have bragged about this stock but I did out of pride.

3.I bought EBay to make quick bucks. The stock was varying every day from 34-36. So when stock fell to 34 this time, I purchased 200 of them in hope of selling it at 36 in couple of days. It never touched 36 but kept on falling till 22. At 22 Ebay was a great buy and I knew it but I did not buy. I held on to my 200 stocks at 34$ cost basis. Finally after 10 months Ebay rose back to 34 and I sold it at the break even price to avoid regret.

One of my friend has this philosophy that he must feel successful every day. He does not find this satisfaction at his work so he has started dabbling in the stock market. He is a clear case of someone who is doing it to feel good about himself. Look all around you. You will find Indian software engineers in their late 20s so interested in the market. It is again for the same reason. They try to make up by playing in the market for what is missing in their professional or in some cases personal life.

According to Ken Fisher market is the great humilator so if you play in market accumulating pride and shunning regret, you dont have good probability of making money let alone beating the market. The trick is to shun pride and accumulate regret. Yes I know keeping money in index funds is boring but that is the easiest way to make money in the market.

The Little Book That Beats the Market

2007-02-23T23:35:00.000-08:00

I just finished reading The Little Book That Beats the Market. Although the book talks about a lot of things but the crux of the matter is that if you want to beat the market buy low and sell high. Well every investment book tells you that and then they talk about how to spot deals and times to sell. This books tells you to buy the stocks with higher earning yield and high return on assets. The book calls it the magical formula.
Apply this magical formula on all the companies with market capitalization higher than a certain number and then chose about 20-30 stocks from top 50-100 and slowly build a portfolio from these stocks.
The writer has even prepared the calculator for you to pick stocks. Here it is
http://www.magicformulainvesting.com/