Monthly Archives: October 2016

In this digital age, it seems that everyone has at least twenty ways that they can be contacted. The U.S. government requires us all to have a physical address where we can receive mail. But, why not have an electronic address registered as well? What if we are out of the country and can’t get our mail? Or what if we just prefer electonic mediums as a backup for important corresponpondances.

One issue I have with the internet is that governments seem to be decades behind the eight ball in regulating what is going on. There is so much cyber hacking, pornography, spam, and other bad stuff going on. Our government is always there to tax us, but do they protect us as well? Not so much, at least not in 2016 on the internet.

There could be an official separate folder in all email accounts where government or official mail such as bills could come which would be spam free. Additionally, the government could take a closer look at the spam that is coming in and try to determine what is legitimate and what is not. We use opt-in lists, but I still get spammed every day in my gmail account. I thought gmail knew how to filter this stuff out. Maybe not! Or maybe I need to mark more of it as spam so they’ll get a hint.

One day the government will catch up and one day the internet might be the primary form of corresondance. If you have five email accounts, you’ll have to register one with the government and keep that one. But, there’s a great advantage here. If you move, you need to change your physical address. But, what if you could keep your email address for life? Maybe that is not such a bad idea especially if the address could be queriable in government records so your old friends could look you up. Currently, Facebook serves that niche, but what if uncle Sam could?

My friend is very pro index while I am more pro buying stock. But, there are times when indexes are better than buying stocks.

Stock Buying Diversification
Some argue that diversification is “safer” or a better practice when buying stocks. The S&P crashed by about 60% in 2009 and there is nothing “safe” about losing 60% of your money no matter how diversified it is. You are not safe in a fund, because you do not know what you are getting or how badly it will crash. Additionally, many of the companies you are getting might have PE ratios that are far too high to be a suitable investment and might have unsound financial practices as well, not to mention inefficient business practices. I like to invest in the best and forget the rest. I once had a safe mutual fund and lose more than half my money in 2002 when the market crashed. I learned a valuable lesson. Know what you are buying and see how hard it crashes when it crashes. Now, that we have had a 2002 crash and a 2008 crash and a 2015 reset or perhaps two resets, I am familiar with checking stocks to see how badly they crash.

My Stock Algorithms
I created a clunky, but suitable algorithm for picking stocks. I use it along with my basic judgment as no algorithm is perfect — at least no algorithm that I am smart enough to create. In any case, I didn’t want to invest in too many stocks as it becomes too much work to track. So, I decided to have four main stocks where 85% of my stock money would go and then have a handful of others each having a smaller investment of about 2-3% of my total stock expenditures. It took a few days for me to decide on my lucky four, and I made sure they were all in different industries as well. I made sure that three of the four stocks were stable in previous crashes because I don’t want to lose my money. Having four stable stocks that don’t crash is a lot safer than a mutual fund with 100 stocks that all crash every time there is a stock market crash. Additionally, my big money is going into companies that are roughly 100 years old, and they survived the Great Depression making them very stable, not to mention their stable financial and managerial practices.

When are Indexes Good?
For older companies that have been around since the Great Depression, there are so few of them, and they are such large conglomorates, that I don’t think you need to diversify so much. Coca-Cola owns 500 different beverage companies. They have more diversification within that one stock than most mutual funds. I can analyze each older company by hand since there are so few around. But, newer companies that don’t have a stable track record, don’t have stable income and engage in innovation require diversification. It is possible that an industry with 300 players could be reduced to two players after the others get weeded out. Innovation is a risky game and the minute someone beats you innovating a popular product, then you could lose most of your business.

For Biotech and Tech, indexes seem like a better idea than buying stocks with the exception of IBM which is a much more established conglomorate that does not engage in innovation. Between Apple, Verizon and Samsung, how can you know which company will out do the other one in a few years. I suspect Apple will win the game, but the Koreans might surprise us all as they are pretty smart over there. Between the various biotech companies, how do you know which one will have the next breakthrough? Most of those companies are less than 25 years old. It is so unpredictable and none of the companies have a solid track record. For these types of unpredictable industries a fund is better. Additionally, for utility companies, their margins are so low and their debt is so high, it might be safer to buy a fund.

So, for me, I’ve decided to get both stocks and indexes. But, probably more stocks than indexes. I will be investing in a biotech index in the next few weeks. That is one of the fastest growing market segments. I don’t know if they’ll continue to grow, but I suspect they will until they can figure out how to clone us.

Unfortunately, this perfect work environment is 500 miles away, so I can’t go that often. But, I feel so good there. Ukiah, California is in the middle of nowhere roughtly 200 miles north of San Francisco, CA. I go up there from time to time to work. There is nothing to do there. It is an hour North of Wine Country where you can enjoy amazing food, wine and cool people. It is an hour East of the Ocean where you can enjoy gardens, beaches, parks, great beer, wine, and more restaurants. But, there is nothing much to do in this tiny town. They have a very nice health food store with amazing pastries, and a few passable restaurants. But, I find that I am ecstatic and get a lot of work done in this small town.

I typically will go up to meditate in an ashram in Nevada city for a few days before going to Ukiah. After meditating seven hours a day, day after day, I’ll need to catch up on my work. So, in Ukiah, I bring phone lists and am on the phone all day long. But, in Ukiah, I achieve balance.

I’ll meditate three times a day which is perfect. I meditate in the morning, after lunch, and before I go to bed. I am unable to be so regular about meditating at home for some reason. I work and work and work without tire as well. Finally, I’ll walk around for an hour with vigor since I feel so good. There is nowhere good to walk, so I walk around the hotel for an hour which feels great! There’s a Starbucks next door, Jack in the Box, and Mexican food nearby as well as a few Chinese joints within a few minutes drive. The Brewery has great burgers and there are a few fancy places to eat too. For me, the town is just a place to feel amazing.

Do you have a place where you feel amazing? Maybe you should visit there and bring your work. If you run an office, perhaps you should set up your office there. Too many people are packed into big cities. Sometimes it is nicer to be in the countryside in a place where you can be happy!

In the world of investing, it is easy to fall prey to dangerous investments. If you have a good broker, they will steer you out of harm’s way. If you want to invest in bonds or stocks, the first thing you should do is to check their credit rating. S&P does credit ratings and so does Moody’s. The ratings systems are similar, but start diverging when you get into the BBB or baa range. The two do not translate directly into each other. So, it’s complicated.

AAA investments are by far the safest. They are almost guaranteed to pay you back, but the return on investment might be a lot lower as a price you pay for safety. AA is the next best bet on the S&P scale with roughtly a (.2)% chance of default in any given year. Those are odds I can handle if I am diversitifed. A+, A, and A- are around a (.3) to (.7)% chance of default in any given year. Once you get into BBB territory, then you are in a lot of risk. If you invest in a 45 year old bond that is BBB, there might be a 1.5 chance per year that they default, but after 45 years that turns into more of a 65% chance of default. Do you really want to take that risk unless the monthly payments are high?

Then, there are Illinois and their partner in crime Puerto Rico. These two territories have bonds up the yin-yang who are not looking like they will get paid off. Investors are picking them up at half price hoping for the best.

In my opinion, the biggest issue with this whole investing fiasco is that most financial entities put themselves into too much debt. First they borrow a little, and then a little becomes a lot. It’s easy to get into debt, but not so easy to get out. Once your debt is beyond a particular point — depending on how old your establishment is and what industry you’re in — then, your credit rating goes down and your interest rate goes up putting you in an even worse situation.

When I invest in stocks or bonds, before I even look at the credit rating, I look at how in debt you are, and how much your debt fluctuates from year to year as well as how stable your income is in a recession such as 2009.

In any case, my broker emailed me with rates for utility and trash bonds. I replied:

“I said I wanted junk bonds, not trash bonds!”

What is SDR? This is not a term that shows up on Investopedia or Wikinvest. That’s right. I invented it because I wanted to have a better understanding of risk analysis. As I look at hundreds of stocks, it is impossible for me to determine risk. I don’t know the industries well, or the people running these companies. I have only common sense, articles on the internet, and numbers to crunch. How much a company makes per share matters a lot to me as a metric for “return” on investment as well as dividends and growth averages over the life of the company. However, risk is also another important criteria.

SDR means:
(stability in income) : debt ratio.
If you look at a company’s financial records, you can see what their earnings have been year after year after year. It is generally good to buy a stock that is growing in income. If every year that goes by, the company makes more and more money, your stock will probably go up in value as it will affect the stock’s price per earnings ratio which is one of the most critical metrics in stock analysis.

Earnings growth & stability
What I do is to look at the company’s earnings over the last twenty years and calculate an average percentage growth. Unfortunately, in the real world growth is compounded, so you will be forced to use “the rule of 72” which you can look up on the internet. Putting 72’s aside, I look for income stability, particularly in recessions. I am terribly afraid that my stock investments will go bust if there is a bad depression similar to 1929. So, if I see a stock that survived the great depression, and didn’t do too badly in the recession of 2008 & 2009, then it has some stability to it. I analyze how stable or unstable the consistency in their income per share is, and add that to my stock algorithm.

Is unstable earnings bad?
However, after long and careful thought, I decided that a company with unstable income is not the worst thing. If you hold that company for twenty years, the fact that they had a bad year in 2021 and 2027 won’t phase you assuming they don’t go out of business completely and assuming you don’t need to sell the shares suddenly during a bad year. If a company is deep in debt, that is not necessarily a horrible thing assuming its income is relatively stable at all times including economic downturns. I learned that companies like Coke, Pepsi and Kraft stay steady in bad times while Mastercard, Starbucks, and Sam Adams did not do as well.

The basic idea is that a company that is deep in debt that also has unstable income is a likely candidate for bankruptcy in the next decade or so. It is unclear when a company would go under, but it happens all the time. If income is not stable, but the company’s equity ratio is high — you might be safe. If the income is stable but the debt is high, you also might be safe. Ideally you would have low debt and stable income, but that is only the care with very few companies. The point of this article is that I no longer analyze debt ratio as a separate issue as its relevancy only matters when combined with income stability stats.

In short, in my algorithm gives stocks up to 20 points. 3 of those points are earned from the SDR portion of the algorithm. Perhaps I should give more as two of the stocks I just bought just fell about 10% the day after I purchased them — gulp! If you have low debt and stable income you get all three points. If you have unstable income with high equity or vice versa, you might get two out of three points. But, if you are lacking in both departments, I might assign you a negative rating since the risk would be quite severe! I created a table to go over all possible scenarios including moderate debt and moderate income stability, moderate to low, and various gradations. If you like my idea for this component of a stock buying algorithm, you can create your own table and fool around with it until you get it how you like it. Algorithms are not for everyone, but if you do things like buying stocks or hiring outsourcing companies — you need some type of an algorithm combined with a good sense of people!