"Silly analyst, Trix are for kids!"

Helpful Video on "Quantitative Easing"

2008-12-23T15:05:00.000-08:00

I enjoyed this informative video on the subject of Quantitative Easing.

(Hat tip: Paul Kedrosky of Infectious Greed)

Quantitative easing from Marketplace on Vimeo.
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"Long-term" Oil Trade

2008-12-09T10:35:00.000-08:00

This entry is a re-hash of a post that I read on iBankCoin. Written by JimPunkrockford. Please direct credit for this trade to him. I'm simply a spreadsheet junkie that took his trade and turned it into this.

You may have noticed that the title of this entry is in quotes. The reason for this is that long-term typically means 5+ years. However, with the market volatility we've seen lately I think it's appropriate to consider a one year trade "long-term."

Key aspects of this buy/write trade:

1) Futures markets are betting oil will go higher
2) You are not making a downside bet against oil
3) Go long USO
4) Sell a call option that gives speculators rights to your shares of USO
5) Selling the call will give you 25% protection to the downside of oil
6) As long as oil stays above ~$33/BBL the trade is profitable
7) If at expiration, oil is above $44/BBL you will get called and you get to keep the call premium.

This looks like a great trade. The thing to keep in mind is that you will be locking up capital for over a year. Should you need the money before then it could be expensive for you to unwind the trade.
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Chapter 5: Investment Policy

2008-08-03T20:13:00.000-07:00

I have dedicated myself to a year-long study of Benjamin Graham's book Security Analysis. Currently, I'm studying:

Part 1: Survey and Approach
Chapter 5: Investment Policy

(page 47) ...investment policy...means the allocation of the available funds among the various types of securities, including variations in such proportions under changing conditions, and decisions to hold cash for future commitments.

(page 47) Security owners are conveniently divided into two main groups -- institutions and individuals.

Subgroup 1. Investment choice subject to comprehension controls

Life insurance companies
Mutual savings banks
"Restricted" trust funds
Commercial banks (including trust companies)

Subgroup 2. Investment choice subject to partial controls

Fire and casualty insurance companies

Subgroup 3. Investment choice not controlled

"Unrestricted" trust funds, including "commingled trusts"
(Most) philanthropic and educational institutions
Regulated investment companies ("investment funds," "mutual funds," "investment trusts")

Investment Policy for Individuals

(page 50) It is accepted doctrine that the investment needs and the appropriate policies of individuals will vary with their particular circumstances, resulting in a kind of parallelism between classes of individuals and classes of institutions. Widows and orphans need safety above all else; their capital should, therefore, be placed in the most conservative securities, in the same way as the funds of life-insurance companies.

(page 51) The average security buyer makes up his policy as his funds become available. He is likely to be speculation-minded in rising markets and a penitent conservative after a drastic fall.

(page 51) Two Classes of Security Buyers. ...Defensive investors are those who should place their chief emphasis upon the avoidance of any serious mistakes or losses and their second emphasis upon freedom from effort, annoyance, and the necessity for making frequent investment decisions.

(page 51) The great majority of security holders belong in the defensive category.

(page 51-2) The chief requirement for all defensive investors is that they exercise firmness in the application of simple principles of sound procedure outlined below.

(page 52) The main hazards they face are of three kinds, viz., being tempted into (1) stock-market speculation, (2) buying second-rate issues, (3) buying good common stocks at excessive prices.

(page 52) The distinguishing feature of [enterprising investors] … is their willingness and ability to devote time and care to the selection of sound and attractive investments. Their chief objective should be to use their training and intelligence to take advantage of the numerous opportunities to buy securities for considerably less than they are worth.

(page 52) The first rule of intelligent action by the enterprising investor must be that he will never embark upon a security operation which he does not fully comprehend and which he cannot justify by reference to the results of his own study and experience. The endeavor to make money in securities is a business undertaking, and it must be conducted in accordance with business principles. (emphasis added)

(page 55) Timing Considerations in Investment Policy. …If he waited for lower prices he would be losing interest on his money; he might "miss his market," even if prices declined; in any case, he was turning himself into a stock trader or speculator. Much of this view retains its validity. However, the time when the investor should clearly not buy common stocks is during the upper ranges of a bull market.

(page 55)…the major consideration for the investor is not when he buys or sells, but at what prices.
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Chapter 4: Investment and Speculation

2008-07-27T14:38:00.000-07:00

I have dedicated myself to a year-long study of Benjamin Graham's book Security Analysis. Currently, I'm studying:

Part 1: Survey and Approach
Chapter 4: Investment and Speculation

(page 33) It is our view that security analysis is primarily useful to the investor, and that it can perform only a limited service at best on the speculator's behalf.

(page 33) General connotations of the term "investment."

My Thoughts: Graham has three meanings when talking about "investment."

(page 33) The first meaning...relates to putting or having money in a business. ...The second set of uses applies the term in a similar manner to the field of finance. In this sense all securities are "investments." ...a third and more limited connotation -- that of investment as opposed to speculation.

(page 34) It should be essential...for anyone engaging in financial operations to know whether he is investing or speculating and, if the latter, to make sure that his speculation is a justifiable one.

My Thoughts: Generally speaking, nearly everyone understands an investment versus a speculation, but if you try to formulate a definition then it becomes difficult. One persons investment might be another's speculation.

A friend used to tell me that the definition of a long-term investment is a short-term investment gone bad. By turning the short-term, speculative investment into a long-term investment; the investor has justified away their error for speculation. I suspect Graham would agree by his comment:

(page 35-6) Long-term speculation is equally well established as a rueful fact (when the purchaser holds on hoping to make up a loss)...

(page 37) A proposed definition of investment. This comparison suggests that it is not enough to identify investment with expected safety; the expectation must be based on study and standards. &160;At the same time, the investor need not necessarily be interested in current income; he may at times legitimately base his purchase on a return which is accumulating to his credit and realized by him after a longer or shorter wait.

My Thoughts: The term "investment" is not one size fits all. Investors differ from each other and provided solid study and standards have been given to the investment opportunity, the investor may move forward with the decision to buy or sell.

(page 38) An investment operation[1] is one which, upon thorough analysis[2], promises safety[3] of principal and a satisfactory return[4]. Operations not meeting these requirements are speculative.

My Thoughts: (Number labels were added for the benefit of my study)

(page 38) [1] We speak of an "investment operation" rather than an issue or a purchase, for several reasons. It is unsound to think always of investment character as inhering in an issue per se.

The price is frequently an essential element...furthermore, an investment might be justified in a group of issues...it is also proper to consider as investment operations certain types of arbitrage and hedging commitments.

(page 38) [2] By "thorough analysis" we mean, of course, the study of the facts in the light of established standards of safety and value.

(page 38) [3] The "safety" sough in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations.

(page 39) [4] "Satisfactory return" is a wider expression than "adequate income," since it allows for capital appreciation or profit as well as current interest or dividend yield. "Satisfactory" is a subjective term; it covers any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.

(page 41) The value of analysis diminishes as the element of chance increases. ...Even if we grant that analysis can give the speculator a mathematical advantage, it does not assure him a profit. His ventures remain hazardous; in any individual case a loss may be taken; and after the operation is concluded, it is difficult to determine whether the analyst's contribution has been a benefit or a detriment.

My Thoughts: One can apply as much analysis and study as they want on a speculative investment, but it is still speculation and that engenders the hazard of loss.

(page 42) It would seem prudent, therefore, to consider analysis as an adjunct or auxiliary rather than as a guide in speculation.

(page 45-6) In order to take proper advantage of the margin-of-safety principle in investment operations it is almost always essential that the investor practice adequate diversification. A margin of safety does not guarantee an investment against loss; it merely guarantees that the probabilities are against loss -- and, in the case of common stocks, that the probabilities favor an ultimate profit. The individual probabilities may be turned into a reasonable approximation of certainty by the well-known practice of "spreading the risk." This is the cornerstone of the insurance business, and it should be a cornerstone of sound investment.

My Thoughts: Underlining added for emphasis. I find it interesting to note that Berkshire Hathaway is heavily involved in the business of insurance.
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Chapter 3: The Behavior of the Security Markets

2008-07-20T21:04:00.000-07:00

I have dedicated myself to a year-long study of Benjamin Graham's book Security Analysis. Currently, I'm studying:

Part 1: Survey and Approach
Chapter 3: The Behavior of the Security Markets

(page 23) The security analyst operates in the area of marketable securities, and he is deeply concerned with their price behavior. The price to be paid or received for a security is an integral part of any complete analysis.

(page 23) We do not believe that short-run price movements -- the day-to-day or month-to-month variations -- are a valid or profitable concern of the security analyst.

(page 23-24) High-grade bonds are by definition, exempt from present or future doubt as to prompt payment of interest or principal. Their price should be controlled mainly by the going rate of interest for their maturity bracket. Therefore, the main point of anticipation is the future course of interest rates.

(page 25) Call provisions are basically adverse arrangements, of the "heads I win, tails you lose" description. Their over-all result is that when interest rates fall the bond investor loses income and when they rise he loses principal value.

(page 25) High-grade preferred stocks...by definition, are subject to no doubts -- present or future -- as to regular payment of the stipulated dividend. If such doubt arise, the market price may be seriously affected even though the dividend is actually uninterrupted.

(page 26) Importance of the price factor...it is important, therefore, for the security analyst to have independent standards of value which resist the pervasive optimism and pessimism of alternating market swings.

(page 28) ...the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.

(page 30) Undervalued situations when the market appears high...In a word, beware of "bargains" when most stocks seem very high.

My Thoughts: The above reminds me of a quote from Warren Buffett, "Be fearful when others are greedy and greedy when others are fearful."

(page 30) Summary. The security analyst should be concerned with those fluctuations in security prices which tend to create opportunities to buy at less than indicated value and to sell at more than such value. He should not devote his attention to short-term market movements, as such, nor to precise timing of changes in the market's direction, for either major or minor swings.
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Chapter 2: The Scope and Limitations of Security Analysis

2008-07-14T15:07:00.000-07:00

I have dedicated myself to a year-long study of Benjamin Graham's book Security Analysis. Currently, I'm studying:

Part I: Survey and Approach
Chapter 2: The Scope and Limitations of Security Analysis

(page 13) "Analysis" connotes the careful study of available facts with the attempt to draw conclusions therefrom based on established principles and sound logic. It is part of the scientific method. But in applying analysis to the field of securities we encounter the serious obstacles that investment by nature is not an exact science.

My Thoughts: Analysis is useful, but with an understanding that a certain level of "individual art (skill)" is involved. This links back to Graham's comment on page 1, "He must be able to resist human nature itself sufficiently to mistrust his own feelings when they are part of mass psychology."

Graham has also been quoted saying, "You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right -- and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else."

(page 13) The functions of analysis may be described under three headings: descriptive, selective, and critical.

(page 13) Descriptive analysis limits itself to marshaling the important facts relating to an issue and presenting them in a coherent, readily intelligible manner.

My Thoughts: There are three areas to get descriptive information for analysis. They are: 1) company figures, 2) my own adjustments to put different (page 14) "companies on a fairly comparable plane" and, 3) the company's present situation within the economic environment.

(page 14) Selective function. The senior analyst must be ready to pass judgment on the merits of securities. He is expected to advise others on their purchase, sale, retention, or exchange.

(page 21) The critical function of security analysis. Analytical judgments are reached by applying standards to facts. It is a matter of great moment to the analyst that the facts be fairly presented, and this means that he must be highly critical of accounting methods. Finally, he must concern himself with all corporate policies affecting the security owner, for the value of the issue which he analyzes may be largely dependent upon the acts of the management.

My Thoughts: Do not assume that management knows what the analyst's best needs are when presenting financials. Dig through and get the numbers yourself. Validate and use common sense tests to see if the information presented is fair and representative of actual (or expected) results.
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Chapter 1: Introduction.

2008-07-07T09:16:00.001-07:00

I have dedicated myself to a year-long study of Benjamin Graham's book Security Analysis. Currently, I'm studying:

Part I: Survey and Approach
Chapter 1: Introduction. The Array of Securities. Economic Background.

(page 1) The objectives of security analysis are twofold. First, it seeks to present the important facts regarding a stock or bond issue, in a manner most informing and useful to an actual or potential owner. Second, it seeks to reach dependable conclusions, based upon the facts and applicable standards, as to the safety and attractiveness of a given security at the current or an assumed price.

(page 1) To do these jobs creditably the analyst needs a wide equipment:

He must understand security forms,
Corporate accounting,
The basic elements that make for the success or failure of various kinds of businesses,
The general workings of our economy,
And finally the characteristics of our security markets.

(page 1) He must be able to:

Dig for facts,
To evaluate them critically,
And to apply his conclusions with good judgment and a fair amount of imagination.

(page 1) He must be able to resist human nature itself sufficiently to mistrust his own feelings when they are part of mass psychology. He must have courage commensurate with his competence.

(page 1) Security analysis [is] a systematic activity, with practical objectives.

(page 3) The soundness of a security purchase is determined by future developments and not by past history or statistics. But the future cannot be analyzed; we can seek only to anticipate it intelligently and to prepare for it prudently.

(page 8) The matters that concern the investor most immediately are (1) the general price level, (2) interest rates, (3) business profits, (4) dividends, and (5) security-price movements.
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Security Analysis: The Intelligent Investor

2008-06-25T14:49:00.000-07:00

I am about half-way through the book The Intelligent Investor and I still feel comfortable with the July 1st start date for reading Security Analysis.

Below is a list of the main lessons of the book that I'm re-familiarizing myself with:

(Credits: David Merkel of The Aleph Blog)

1) Don’t over invest in equities. Markets wash out occasionally, and it’s good to have some bonds around.
2) Don’t under invest in equities. Bonds can only do so much for you, and it is good to deploy capital into equities when they are out of favor.
3) Stocks provide modest compensation against inflation risks.
4) Avoid callable bonds. Avoid preferred stocks.
5) Be conservative in bond investing. Read the prospectus carefully. Often a bond is less safe than one would expect, and occasionally, it offers more value than one would expect.
6) Purchase bargain issues on a net asset value basis when you can find them, but be careful of quality issues.
7) Volatility of stock prices can be your friend if you understand the underlying value of a well-financed corporation.
8) Having a longer-term investment horizon is valuable, because one can take advantage of short-term fluctuations in price.
9) Growth is worth paying up for, but be disciplined. Don’t overpay.
10) Be wary of mutual funds.
11) Be wary of experts.
12) Pay attention to the balance sheet; don’t invest in companies that are inadequately financed.
13) Review average earnings of cyclical companies.
14) Buy them safe and cheap. Don’t overpay for growth and "trendiness."
15) Avoid highly acquisitive companies.
16) Watch cash flow, and question unusual accounting treatments.
17) Be careful with unseasoned (new) companies.
18) Strong dividend policies, in companies that can support the dividends, are an indicator of value.
19) Aim for a margin of safety in all investing.
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Security Analysis: An Invitation

2008-06-09T13:07:00.001-07:00

As a means to exercise discipline in applying the concepts of The Intelligent Investor and Security Analysis, both written by Benjamin Graham, I have decided to dedicate myself to a year-long study of Security Analysis.

My first order of business will be to re-read The Intelligent Investor. In doing so, I feel that I will be able to re-establish the mindset of Graham as he leads me through his investment concepts.

Then I will dedicate myself to picking a publicly traded company and applying the concepts and techniques found in Security Analysis and studying the company as a candidate for value investing. My current choice is Chipotle Mexican Grill (CMG).

I have chosen one year so that I can move at a slower pace, which will allow me to compensate for unexpected interruptions. Between a loving wife, four kids and working in the mortgage industry life can get busy at times.

I invite you to join me on this academic journey. Feel free to drop in and out as you choose and please leave comments if something peaks your interest. I will label this series "Security Analysis" for your reference.

I will begin reading Security Analysis on July 1, 2008. Suggestions for a publicly traded company to study are welcomed.
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Looks Painful

2008-03-18T12:20:00.001-07:00

Taken at Upper Newport Back Bay in Newport Beach, CA

Splash Mountain

2008-03-04T16:53:00.000-08:00

That's us in the back. Kayley was screaming pretty loud.

Sunset

2008-01-02T16:42:00.001-08:00

Small World

2007-12-15T17:06:00.001-08:00

Some Red Some Purple

2007-12-07T16:39:00.000-08:00

Woosh

2007-11-16T06:58:00.001-08:00

Reflecting the Sun

2007-11-09T12:37:00.001-08:00

Nicholas is Dead Tired

2007-10-29T08:49:00.001-07:00

Ash and Two Trees

2007-10-24T16:45:00.001-07:00

Wildfires Still Burn

2007-10-24T07:10:00.000-07:00

Driving on the Toll Road

2007-10-17T16:26:00.001-07:00

Morning's Horizon

2007-10-16T07:32:00.001-07:00

Find The Eagle

2007-10-13T17:34:00.001-07:00

Burning Embers

2007-10-12T12:50:00.001-07:00

Rows of Clouds

2007-10-11T15:27:00.001-07:00

Worm Genocide

2007-10-10T15:15:00.000-07:00