What grinds my gears is the "over-the-head" language that financial planners speak to their clients with. I feel like most of them have the same disease that the majority of college professors have...they believe that the client is there for them, not the other way around.
How wrong they are!
Clients of financial planners aren't required to employ a specific planner. The planner is there for the client, and should treat them as such. Talking over your clients' heads does make you sound smarter. Yet, it fails to accomplish the reason they are even there. Financial planners are there to teach and guide their clients. And if I remember correctly teaching and guiding requires simple explanations to complex problems. That's why if you've read this blog before, I try my best to convey certain theories and strategies in the most simplistic manner possible.
Tuesday, August 24, 2010
Thursday, August 19, 2010
How the broker got rich: A cautionary tale
Story is a paraphrased excerpt from Ric Edelman's "the Truth about Money":
Needless to say when the broker was exposed, he was banned from the securities industry. We wanted to post this story to detail some of the crafty plans people will design to "steal" your money. If you ever hear of an investment deal that is too good to be true, perform extensive due diligence and research. Also, always take a stranger's claims with a grain of salt, no matter how credible they seem to be.
Here's the story of a broker who attracted new clients by demonstrating his ability to pick winners every time.
How did he do it? Each month, he'd mail letters to 100 prospective clients. Fifty of the prospects would receive a letter telling them to "buy" a stock; the other fifty to "sell" the same stock.
He would then take the list of picks he got correct, split them and apply the same logic from the previous paragraph. He would continue this process for four rounds(four months). Afterward, he would send a letter exclaiming his ability to go 4/4 in his previous stock picks. Attempting to persuade the list's occupants to give him money to actively manage. And they would.
Needless to say when the broker was exposed, he was banned from the securities industry. We wanted to post this story to detail some of the crafty plans people will design to "steal" your money. If you ever hear of an investment deal that is too good to be true, perform extensive due diligence and research. Also, always take a stranger's claims with a grain of salt, no matter how credible they seem to be.
Friday, August 13, 2010
What I think about Skype...
I think Skype is a great company. Not because of what they've done, or because it's the only reason that my company runs for as little required overhead as it could muster. I like it because they have a user base of 500 million plus, and they've only converted 6% to paying customers.
What I see in this, is a gold mine.
If Skype can just use a simple adsense revenue model, the most basic of basic, they could make quite a sizable amount of cash. I stay updated with tech blogs. And from what I'm reading, Skype is configuring new features that may be only accessed by premium users. With these two simple revenue sources they could significantly increase their bottom line, which would then eventually show up in the market's evaluation of their stock price. However, Skype won't do a simple adsense model, and the model that they come up with will undoubtedly bring in even more revenue.
Keep an eye on Skype, I think that they may surprise people with their five year numbers. As well as with their future financial performances.
Tuesday, August 10, 2010
One instance where quantiy over quality is a good thing (part one)
What's an investment strategy that seems to go over the heads of most investors? The concept that investing is more about how many shares you own, less about how much they are worth.
For example: having one share at $100/share rise $10 is all well and dandy. But, if you have 10 shares at $10/share($100 value) rising $2/share...you end up profiting more for a lot less work.
If you've invested much at all you know how easy it is for the $20 gain to be negligible (mainly due to commissions on the buy and sell execution). As you raise the scaling of the amount of shares, say quadruple it, the playing field alters dramatically. Quadrupling the shares (putting each at a value of $400) would increase the marginal difference to $40. And so on and so on until you reach a scale that will effectively render the higher stock price useless.
As an investor in the market, many of you know how easy it is for a lower priced stock to jump $2; and how hard it is for a higher priced stock to jump $10. Don't worry my point is coming up.
The reason for this illustration was to show how even with an unrealistic advantage (jumping $10 while lower price only jumps $2); the scenario where lower share prices are involved generally procure more earnings, even at a lower dollar return.
(part deux coming soon)
For example: having one share at $100/share rise $10 is all well and dandy. But, if you have 10 shares at $10/share($100 value) rising $2/share...you end up profiting more for a lot less work.
110(or 100+10) < 120 (or [10*10]+[10*2])
If you've invested much at all you know how easy it is for the $20 gain to be negligible (mainly due to commissions on the buy and sell execution). As you raise the scaling of the amount of shares, say quadruple it, the playing field alters dramatically. Quadrupling the shares (putting each at a value of $400) would increase the marginal difference to $40. And so on and so on until you reach a scale that will effectively render the higher stock price useless.
As an investor in the market, many of you know how easy it is for a lower priced stock to jump $2; and how hard it is for a higher priced stock to jump $10. Don't worry my point is coming up.
The reason for this illustration was to show how even with an unrealistic advantage (jumping $10 while lower price only jumps $2); the scenario where lower share prices are involved generally procure more earnings, even at a lower dollar return.
(part deux coming soon)
Friday, August 6, 2010
R&D: The true metric behind investing in innovation
Many investors, especially "common" investors, overlook the most important "tell" about a company's future.
Cash is king
This "tell" is a significant increase in R&D (research and development). R&D tells a story that most financial statements cannot share. Sure, a lack of cash may signify some spending. But, an anomaly in two or more quarters may require more attention to be paid to the cash flow statement.
When looking at the cash flow statement look at what they are spending on and categorizing in the "investing" section. If they purchased a building that seems rather excessive in size, dig a little bit deeper.
Follow the Expenses
Whatever you do, do not forget to analyze 6-month (or two quarters) income statements. Here you may see major increases in "equipment" or "payroll" expenses. If the two correlate, don't be alarmed. It's probably just the company purchasing items for new staff. However, if they seem to be blown way out of proportion (exponentially increase)...dig way deeper. They could be hiring new product engineers or specialty types for a new product innovation push. Which brings us to the last point.
Investing in HR
Job boards. Career pages. If you have time, the hiring information are readily available on thousands of websites; look at the hiring of the company you wish to invest in. Two things could be the cause of hiring outside of their industry: 1) they are looking into developing new products 2) they have a lot more cash than usual. The latter reason won't show up in plain sight on financial statements (after they have hired new employees). Who a company is hiring is a major sign of what direction they are headed for the future. If a major company like HP starts posting jobs for "cellular engineers" or "wireless architects"...something is coming.
Conclusion
Always stay aware of what's going on under the radar. If something odd is happening in a company for two consecutive quarters, always dig deeper for signs of internal innovation. R&D can be an investment in people (job boards/hiring push), extra cash (investing into producing for different market segments), or expenses (buying equipment so that new hires can produce new products for different market segments).
Cash is king
This "tell" is a significant increase in R&D (research and development). R&D tells a story that most financial statements cannot share. Sure, a lack of cash may signify some spending. But, an anomaly in two or more quarters may require more attention to be paid to the cash flow statement.
When looking at the cash flow statement look at what they are spending on and categorizing in the "investing" section. If they purchased a building that seems rather excessive in size, dig a little bit deeper.
Follow the Expenses
Whatever you do, do not forget to analyze 6-month (or two quarters) income statements. Here you may see major increases in "equipment" or "payroll" expenses. If the two correlate, don't be alarmed. It's probably just the company purchasing items for new staff. However, if they seem to be blown way out of proportion (exponentially increase)...dig way deeper. They could be hiring new product engineers or specialty types for a new product innovation push. Which brings us to the last point.
Investing in HR
Job boards. Career pages. If you have time, the hiring information are readily available on thousands of websites; look at the hiring of the company you wish to invest in. Two things could be the cause of hiring outside of their industry: 1) they are looking into developing new products 2) they have a lot more cash than usual. The latter reason won't show up in plain sight on financial statements (after they have hired new employees). Who a company is hiring is a major sign of what direction they are headed for the future. If a major company like HP starts posting jobs for "cellular engineers" or "wireless architects"...something is coming.
Conclusion
Always stay aware of what's going on under the radar. If something odd is happening in a company for two consecutive quarters, always dig deeper for signs of internal innovation. R&D can be an investment in people (job boards/hiring push), extra cash (investing into producing for different market segments), or expenses (buying equipment so that new hires can produce new products for different market segments).
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