Tuesday, May 31, 2011

Is it a Zero-Sum Game?

Hey there

So exams are seriously getting close now. My first paper is in 20 days, which is not very long considering how much I have to study and how many assignments I have to complete.

About a week ago I received an email from a fellow trader that is a lot more experienced than I am and he pointed out a few interesting things that I thought I should share.

The email was in response to my post on bubbles and to summarize it, he put greed and overuse of leverage as one of the causes of bubbles. Most traders would have watched the movie Wall Street. Along with: Goodfellas, Barbarians at the Gate, Citizen Kane, Boiler Room, Wall Street is definitely one of my favourite business movies.

If you’ve watched Wall Street, I’m sure you are familiar with the character Gordon Gekko. In that movie, he was one of the greatest traders, known for his savage I-dont-care-what-happens-to-you-as-long-as-I-make-a-profit mentality. He shows Bud Fox, played by Charlie Sheen before he became crazy, the ways of trading and how to gain insider information. There is a few great moments in the movie when Gordon utters an amazing speech about how greed is good and trading is a zero-sum game.

So what is a zero-sum game? Basically, if I make a profit, someone else makes a loss. If I make a loss, someone else makes a profit and the nett result is zero. Wealth is not created it was merely transferred. So better transferred to me than to someone else. He emphasized that if you are not careful, someone is always ready to take your money.

Thats how I’ve been thinking about the markets for years. I always thought of it as a zero-sum game. There is always somebody on the other side of the deal and if you are making a profit, he is making a loss. However, that email said something else that makes a lot of sense as well. He said to think of it as a minus sum game because we have to factor in brokerage costs and other fees as well.

It was a glass shattering moment for me. DUH... Oh course.... How can you forget to factor in brokerage, account keeping fees, research cost, charting softwares and if you are like me, a lot of books and magazines into this zero-sum game theory.

A zero-sum games implies that as long as you make a profit, its fine. But a minus-sum game implies that you not only have to be in the right position, that correct position must be big enough to cover your other costs as well. So remember to bear that in mind!

So have you heard of this zero-sum game theory? What do you think about it? Is it valid? Or is the markets more of a minus sum game? Or you have heard of another theory altogether?

Do send me emails or drop comments. I really do appreciate them and it really aids with the learning curve. Thanks for reading! Remember to like the page on facebook if you like this site!

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Sunday, May 29, 2011

The Unintelligent Investor's Definition of the Week: Moral hazard

Moral hazard

Oxford dictionary’s definition: lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance.

The Unintelligent Investor’s explanation

Moral hazard is usually described by insurance companies. As Oxford dictionary explained, it is the lack of incentive to guard against risk. For example, if you own a car and it is insured, you might leave it unlocked, or drive recklessly or park it outside even though it is going to hail, etc because you are insured. So you have the lack of incentive to look after your car and protect it against damage because you know if your car gets stole, you can claim money from the insurance company and buy a new one. So in that case, the insurance company is exposed to moral hazard and I’m sure that is factored into their premium calculations.

In investing terms, us as investors are exposed to moral hazard if we invest in funds, or banks or any trader. This is because the managers do not fully bear the cost if things go badly. If the managers make a bad decision, they lose our money, not theirs. As a result, they might take an unnecessarily high amount of risk because it is not their money to lose. Just look at the big banks in America, their blunders are not only paid for by the investors, people lost their houses and on top of that, tax payers had to cough up money to bail out failing financial institutions. Some fund managers lost their jobs but some pocketed millions more.

Moral hazard also happens when there is no full disclosure of information. Fund managers don’t always tell us how they invest our money or how they plan to. A lot of the time we put our money in the fund and has no idea what is happening to it. As long as there is a profit, we don’t really care where the profit came from (very evident in the Bernie Madoff case). So the managers are not only insulated from risk but they also have more information about their actions and intentions. Us as investors just have no idea.

So remember about moral hazard when investing in a fund. Remember to pay special attention to how a fund manages risk. What do you think? Do you have any idea how your fund manager manages risk? Do you have any idea where your money is going to?

Thanks for reading! Do leave me comments or send me emails. I am always happy to read them. Click on the little like button to like the page on facebook! :)

Next post Tuesday

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Thursday, May 26, 2011

The Best Saleswomen

Hey there,

Before I start typing I just want to say a very big thank you to all of you guys for coming back, visiting, dropping comments and sending me emails. The site has been up for a bit over 2 months now and has received 2000 hits. I know it is not a huge number compared to the World Wide Web but it is a fairly big number to me. So thank you all so much!

It is less than 4 weeks to the end of semester exams now. If I pass this exam, I’ll only be 3 semester away from being able to say “thats Dr Sia for you, bitch.” Lol, which is kinda scary if you ask me. In 3 semesters (if I pass) I’ll actually be trusted with making life saving or ending decisions, hopefully with a lot of guidance from the registrars and consultants.

Anyway I had just come home from Bacchus, which was a fantastic place to have some dessert, drinks and chill with a friend, or if you’re like me sometimes with nobody else but your laptop. While waiting for my friend, I was thinking about Oprah, yes your read correctly, Oprah.

If any of you watched any tv at all, you’ll know that Oprah Winfrey is ending the Oprah show. I don’t usually watch Oprah but today, while having dinner, I was watching one of her final 3 shows on channel 10 and I am probably understating it when I say she has achieved a lot.

Besides the fact that she is the world’s first female black billionaire and that Forbes estimated her worth to be around 2.7 billion in September 2010 she has actually made a very big mark in our world. It is incredible actually, how much one single person can do to inspire change. Thats right, her emotional, sentimental, touchy feely, talk-about-your-feelings-and-lets-all-cry, tv show actually inspire change. Some people watch her show and decide to help the environment, learn to read, lose weight, do something about their life, etc.

We can all learn something from Oprah, this lady who came from nothing to more than 2.7 billion all by talking. I think of her as one of the best salesperson in the world. For her to build a cult like following, she needs to sell herself and her ideas very very well. She needs to be able to speak so well that people watching her on tv across the world believes what she says. When she says that world is dying, her followers believe her. When she says that obesity is bad and you should do something about it, her followers listen to her. If she says buy this because its good for you, they’ll probably buy it too.

So this is one lady who has given so much back to our world. She has helped rebuild schools, help educate people especially women in parts of the world where gender equality is poor, given so much to various charities, encouraged people to start charities to make a difference, and of course if you are in the audience for her Christmas episodes, she might give you a car as well.

I remember when I was younger, mum used to watch a bit of Oprah. She also had a book about Oprah. She told me that when Oprah was young, she was forced to learn 10 new words everyday (I don’t know if thats true) and that Oprah had a very rough childhood. She read and learnt a lot to be able to get to where she is today. So according to my mum, and we know mums are always right; Oprah’s massive success is not only owed to her charisma but her early education and reading. Those 10 words per day probably gave her a lot of words to use in her talk shows.

So this is something we can learn from her. As a teenager or a young adult, there is no better investment than education.

If only I listed to mum when I was young, maybe I could type my way to 2.7 billion dollars and not rely on Google’s thesaurus lol.

So are you a big fan of Oprah’s? What can we learn or have you learnt from her? Are you glad that The Oprah Winfrey show is finally ending and dreading the programs that are going to pop up on the Oprah Winfrey Network?

Do drop comments or send me emails, I am always happy to read them. If you like the site click on the little like button on the right hand side of the screen to like the page on facebook or follow me on twitter. Or even share the site on your profile!

Next post Sunday! :)

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Tuesday, May 24, 2011

I Suck

Hey there,

First of all, I still have 2 brand new books to give away lol. 1st is The Intelligent Investor by Benjamin Graham and the 2nd is Buffetology Workbook by Mary Buffet and David Clark. I’ve finished reading both books and they are both awesome. To make it super simple, just like the page on facebook and as soon as I get 50 likes, I’ll randomly pick a person and give the 1st one away, as soon as I get 100 likes, I’ll give away the 2nd. So if you wanna stand a chance to win these books be sure to check out the facebook page and like it!


Now, for those of you who participated in the trading places competition, congratulations, the competition is finally over. Does not matter what place you ended up, as long as you learnt something from the experience (I’m saying this only because I did very badly lol. If I did well, it would be something like you guys all suck and I'm awesome).

So in summary, I ended up with 187 086 dollars which means I was ranked about 2700 in Australia FML. I cannot take a snapshot of what my portfolio was like because of copyright reasons but I’ll list what I was holding at the end of the game.


My best trade was with EWC, making me about 4000 dollars. Every other profit was negligible and other trades ended up in losses. I also made about 1000 dollars in dividens.

Now, what happened?

I was doing very well up till the end of the 2nd week. After that, things started going downhill and never recovered. So I did okay in the 1st week and decided to take more risk for the 2nd week. It paid off and I was ranked 22nd in Australia briefly. High risk, high reward, correct? I was trading mostly in penny stocks so every tiny movement equated to thousands in profit or loss. I did not randomly take position in small cap companies. I had a few criteria that I stuck to. Basically, they were Darvas Box breakthroughs as well as moving average crossovers, 21 day and 15 day.

However, after the 2nd week, I completely lost track of my portfolio. I woke up and got to the hospital before markets opened and got home after they closed. As a result I was always behind and because of the interface, I could not place orders when the markets were closed. By the 3rd week, I was so far behind I didn’t know how to recover. With the amount of risk I took, if you didnt keep a very close eye on your portfolio, you can lose everything, which was what happened.

If I had the time, or if the interface allowed us to place stop loss orders, I would have liquidated most of my portfolio when the stop losses came into play and focus on managing drawdowns for the remainder of the competition. If I had did that, I would have done a lot better. Oh well, lesson learnt.

Another thing that I learnt was that 15 and 21 day moving average was way too long for this very short competition. By the time trends establish themselves the competition would have ended already. I probably should have gone with something a lot shorter like 5 and 10 days.

In conclusion, day trading is definitely not suitable for you if you’re a medical student with no access to the internet while in the hospital. To be honest, I didn’t anticipate that I’ll spend so much time in the hospital. In addition, for such a short competition, 15 and 21 day moving average takes too long and managing downside is as important if not more important than making good trades: e.g. if I didn’t make a single trade for the entire competition, and bought a random company on the last day, I would have ranked higher than I did lol.

So for those of you who did participate in the competition, how did you go? Hopefully a lot better that I did. What did you learn? For those of you who didn’t, I hope to be competing against you next year I promise you I’ll do a lot better, and feel free to drop a comment telling me how badly I did and how much I sucked.

Thanks for reading!

Next post on Thursday :)

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Sunday, May 22, 2011

The Unintelligent Investor's Definition of the Week: Bubble


Oxford Dictionary’s definition: used to refer to a situation or feeling that is unlikely to last: many companies enjoyed rapid expansion before the bubble burst. A bubble of confidence

Unintelligent Investor’s explanation

Bubbles bursting are probably one of the most feared phenomenon to investors and traders alike. Many many many economists and “experts” try to predict formations of bubbles and anticipate when they might eventually burst. There are also many theories out there trying to explain how bubbles form and why inflated prices eventually correct themselves. I don’t know if there is one that is actually accurate.

From what I understand, when bubbles are forming, the economy is generally doing very well. People feel like they have great wealth and can afford to pay higher prices to acquire assets. The government tries to slow down the appreciation of assets by increasing interest rates, making it more expensive to take a loan (how effective this intervention is, is debatable). There is something called the “greater fools” theory, which is when someone, with lots of confidence buys an asset at a high price (fool) with the anticipation that they will sell it to someone else (greater fool) at a higher price. So the price keeps going up as long as there is a greater fool to buy the asset and when this stops, sellers greatly outnumber buyers and BOOM!

A country’s economy is usually badly affected after a bubble has burst. Imagine as investors or traders, you lose a huge chunk of your wealth and that gets worst if you have margin calls or if you have taken the wrong position when selling an option. You somehow have to cough up enough money cover these calls, what happens if you cannot renew your line of credit? You’ll have to severely cut down your spending. So the country not only have to deal with this sudden evaporation of wealth, it has to deal with the fact that people will stop spending money as well.

The movie Wall Street 2 talked about one of the 1st bubbles recorded in history, Tulip Mania (1637). During the Dutch Golden Age, tulips became so valuable that a single Semper augustus bulb can buy you 12 acres of land. The bubble eventually burst and the value of tulip bulbs became so low that people stopped trading it. Imagine being the person who bought the 12 acre of land with 1 bulb. It was a pretty good trade for him if you ask me lol.

Below is a chart of tulip prices that I got from wikipedia made by Earl Thompson

A few examples of bubbles that followed are:
Japanese asset price bubble
Asian Financial Crisis
The very popular Dot-com bubble
US housing bubble
Uranium bubble
Rhodium bubble

Before the Great Depression started, margin requirements were only 10% so for every dollar you have in your deposit account, you are allowed to borrow 9 dollars. Just imagine how much buying power you’ll have and how ridiculously high prices could go. And when asset prices crash, imagine trying to repay those loans.

I guess bubbles forming and popping are inevitable. Its most probably all part of economic cycles. The best we can do is to be cautious. Take a level or risk that is confortable to us. And perform due diligence always! Does not matter how “hot” the stock is, do your homework! I know it is very hard to make a decision to stay out of a stock and watch the price go up and up and up, it can be very disappointing. What I found helpful to me is to remind myself why I decided to stay out of it in the first place instead of looking at what the stock is doing. When we made the decision to stay out, there was no way we could have known what the price is going to do and who knows, the prices could very well crash tomorrow.

Before the term bubbles were used, people used the word mania to describe this crazy inflation and deflation of assets. So dont be manic!

So what bubbles do you think are forming as we speak? And what do you think cause bubbles? Do drop me emails or comments. Type what you think of give me feedback on my post. I’m more than happy to read them. Thanks for reading! Do click on the little like button on the right hand side of the screen to like the page on facebook or follow me on twitter.

Next post on Tuesday!

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Thursday, May 19, 2011

Trade of the Year

Hey there,

I’m sure as traders or investors we all have made bad and good decisions. More than a month ago, I typed a post about one of the biggest mistakes I’ve made as a trader “12 000 dollar mistake”
Today I’ve decided to type about one of the better decisions I’ve made this year.

Look at the chart for AKM below.

I bought some shares in this company on 17th January 2011 at the price of 0.71 per share. I didn’t get in sooner because that was when I had just came back to Australia after the Summer break, moved houses and got my computer set up again. So January 17th was when the price had just broken the resistance line for the 4th Darvas box.

After taking that position, I was in the red for about a month before something happened. At about the middle of March they made an announcement about the quality of coal in one of their projects. If you look at the chart, that is when the price started climbing for 4 days in a row with a volume spike on the day of the announcement (some insider trading going on here? Lol)

In the midst of all this, I almost made a very big mistake. After the 7th box was established, I got a bit greedy and left my stop loss at 0.78 thinking that I would not sell if the price dropped to 0.92 and will hold until I make a bigger profit. Of course when you’re in the right position you always become confident and want to make more. Luckily, after a day or two, I came to my senses and told myself that I really needed to stick to my trading methods. So I moved my stop loss up to 0.91.

Then on April 19th, the price dropped and hit my stop loss. All AKM shares were immediately liquidated automatically. A bit of stress followed as I watched the price climb back up for a few days. And then well I’m sorta glad the price started dropping and continued dropping.

17 Jan, buy @ 0.71
19 April, sell @ 0.91
28.16% gain in 3 months and 2 days.

AKM sold on 19 April, new pair of shoe bought on 15th May lol.

I guess the biggest lesson learnt here is stick to your stop losses!!!!! They can help you limit your losses as well as cash your gains. It can be stressful if after a stop loss is triggered, you lose the opportunity to make more money. Or like in my old post, you lose the opportunity to make a helluva lot of money but they are there for a reason which I think is to reduce the chances of us making a bad and emotional decision when trading which can bring dire consequences.

So what do you think about Darvas boxes and stop losses? Have you ever used them? Do leave comments or send me emails, I’m always happy to read them. If you like this site, click on the little like button on the right hand side of the screen to like the page on facebook or follow me on twitter!

Thanks for reading!

Wednesday, May 18, 2011

Tax Carbon?

Hey there

Sorry I’m one day late posting this. Once again, I’ve been really busy at the hospital, but thanks so much for coming back. If this is your first time on this blog, welcome and I hope you find something interesting to read, if you like what you read, come back!

So exams are getting ridiculously close now. I received an email about 2 days ago saying my first paper will be on the 20th of June which is a bit over a month away. That means I have so much to study and do in such a short period of time. Lets hope I don’t fail the semester because I really really do not want to redo it.

Anyway, I was on SMH and I read an article saying Moody’s has downgraded the big 4 banks in Australia from Aa1 to Aa2, which comes as a surprise to me. I always thought that the big 4 were 4 of the safest banks in the world. Apparently, not so much. Only 14 banks in the world carry S&P’s AA grade or better and the big 4 are 4 out of that 14. And as we can expect, share prices of all four banks fell slightly after this announcement.

Another thing that has been coming up in the news quite a bit this past few days is the carbon tax. What do you think about putting a price on carbon?

So basically, companies have to pay to get a permit to produce greenhouse gases. If they produce less emissions, they are free to sell said permits, allowing them to make an additional profit if they are friendlier to the environment. I think it is a very good idea to encourage green technologies and it is most probably beneficial to the environment as well. My worry is that if companies are forced to pay a tax on their emissions, how will consumers be affected? We all know companies are out to make a profit. If they have to pay this additional cost, wont they have to charge us more, as consumers, to make that profit?

I think another thing this carbon tax does is that it turns pollution into a commodity. Much like buying and selling other commodities, investment banks can buy and sell the right to produce greenhouse gasses and make a profit there as well.

I’m definitely no expert in this but what do you think about putting a price on carbon? Are you for or against it? And why? Do drop me comments or emails, I’m more than happy to read them.


Sunday, May 15, 2011

The Unintelligent Investor's Definition of the Week: Bull and Bear Markets

Bull and Bear Markets

Bull Market
Oxford Dictionary’s definition: a market in which share prices are rising, encouraging buying

Bear Market
Oxford Dictionary’s definition: a market in which share prices are falling, encouraging selling

Unintelligent Investor’s explanation

I guess this post is going to be quite short because these are really simple terms. When you say the market is bullish, you are basically saying that the prices of shares are going up. If you say it is bearish, you mean the prices are falling.

Bull markets are used to describe good times where most shares are going up and you can make money pretty much by putting your money in any company. This is probably especially obvious when the market is recovering from a recession. So remember, as beginners, we might be making money just because the entire market is bullish not because we are pros after being in the market for months lol.

A bear market is usually used to describe a recession. So if we’re making money in a bear market, we’re doing very well. In bear markets we should be happy if we preserve our capital and minimize our drawdown. Maybe an easier way to gauge how well we’re doing is to just compare our results to the indexes.

So anyway,
Bull = good, everybody is making money and is happy.
Bear = ohhh crap...

I don’t know if this is true but someone told me the terms bull and bear markets originated from the way they attack. Bulls thrust upwards with their horns and bears strike downwards with their paws. So there you go, interesting fact?

Thanks for reading, do leave comments or send me emails, I am more than happy to read them. Like the page on facebook by clicking on the little like button on the right hand side of the screen! Or follow me on twitter!

Sigh, time to write some case reports..

Next post on Tuesday!

Thursday, May 12, 2011

Bye Bye Borders.

Hey there,

I’ve only been in Australia for about 3 and a half years, thats right I’m a FOB, but I remember back when I was in first year, even in 2nd year, no wait, even until recently, Borders was like a hang out place for a few of my friends and myself. It was like a library, we got a book, sat at the cafe or at one of the lounges and spend a few hours there before deciding if we should buy a book.

I recently went back to Borders again and the experience was very very very very different this time. Everything was on sale, everything from their books, to their furniture. Yes they went bankrupt, which is maybe inevitable but very unfortunate.

Sure you can buy all the books for maybe half the price on Amazon but Amazon can never give you the experience Borders can. The feeling of walking into a bookstore with their chilled lounge music, browsing for a book, reading a bit of it to see if its worth your money and then purchasing it. Before Borders went bankrupt, that was the concept that they were going for in order to differentiate from their competition Amazon. They realised that online shopping will never give you the experience that a proper physical bookstore offers. They found out that shoppers on average spend about a hour in their stores before making a purchase. Hence, they added the couches, the cafe, the lounge music, the friendly staff, etc. Unfortunately it was not enough.

That is the thing with business though, whats hot and whats not changes with time. Energizer used to do very well, until lithium ion batteries took over. Kodak did very well, until SD memory cards took over. Cassettes did very well until CDs took over and that did very well until iPod took over. Steam engines did well until petrol/diesel engines took over. and the list goes on.

As investors it is probably important that we are wary of these changes even thought they can be very subtle at times. We don’t wanna be putting too much money into a sector or company that is not doing so well.

So although sad that Borders is closing down, oh well, what can we do about it. Be happy that we can buy cheap books from Amazon. And one day, Amazon will meet its demise when something else takes over.

So what do you think about Border’s bankrupt. Could they have done something sooner to prevent this? If you were the CEO of Borders what would you have done to avoid this? What is the next big sector that will be displaced? Do drop me comments or emails, I’m more than happy to read them. Thanks for reading! If you like the blog, click on the little like button on the right hand side of the screen to like the page on facebook, or follow me on twitter!

ps, thanks Frostie, if you're reading this, for talking to me about Borders. I had a massive writer's block.

Tuesday, May 10, 2011

Dirty Capitalist

Hey there,

On a topic totally unrelated to investing, I had fried rice with a glass of red and brownies with ice cream for dinner today. All cooked at home, it was awesome; what did you have? Bet it was not as good as mine lol.

Anyways, Osama Bin Laden’s death occurred only recently and obviously there’ll be a lot of news circulating about this event. Some praises him as a saviour of some sort, I guy who gave up his riches to cleanse the Middle East, some portrays him as a terrorist mastermind and that the world is a better place without him. In a lot of them, they talk about this man fighting against the evil capitalistic Americans.

To be honest, I love capitalism as an idea (thats right I’m a dirty capitalist). I think it is an awesome idea, much like my dinner. I think of it as democracy for your everyday life and you vote using cash, as simple as that. In cities like Hong Kong, there is where capitalism is at its best. For example, if your restaurant is not good enough, news spread, very quickly in a city that is that dense, and very soon you will not get any customers and hence no cash and go bankrupt. On the other hand, if your restaurant is good enough, people come in and pay you for your food and you survive. The yummier your food, the higher you can charge. Like democracy, if people don’t like the way you run the country, you don’t get the votes and you’re out. If they like the way you work, you get the votes and stay in power.

I like the idea of being awarded for doing more work, for example, a miner should be paid more than a cashier. A miner is faced with more work hazards, works harder and possibly longer. I’m not saying a cashier’s job is easier but I would imagine it is easier than working in a mine. And that is what capitalism allows, it allows you to charge more for your services if you are good at it or if you’re sought after. A neurosurgeon can charge 1000 dollars for a consultation and the one down the street might only be able to charge 200 if he is not as good. If he is any worst, he might go bankrupt.

Capitalism is very closely related to supply and demand as well. Like I said before, it is democracy for everyday life. If people want enough of something and the supply is limited, could be a product like a shoe or a service like plastic surgery, the price will go up. When people realise that money can be made in that sector, they get into it. Very soon it will get saturated and over supplied and that is when the price drops again. Sorta like homeostasis if you study science. Thats why every boom is followed by a bust and every bust is followed by a boom.

Much like democracy, capitalism has its downfall as well. And I think its human nature that fails capitalism. People who get paid a lot for their “sought after” services often get too greedy and find ways to get more. For example, a CEO of a company has a very very hard job but is their services really worth 50 million a year? Companies that are making millions of dollars often want to make millions more. And I guess this is where the “exploitation” and “dirty capitalist” comes into play.

Its funny how capitalism has a negative connotation attached to it, but then again I guess it depends on who you talk to. Countries like Cuba do socialism very very well, people get almost an equal pay no matter what they do. Healthcare there is one of the best in the world, and from documentaries I watch their people seem happy.

I’m sure everybody has their own view on this, but I’m definitely more of a capitalist. I’d like to be paid more for the work that I do. Assuming they are quality work, either that or my marketing team will be so good that they will make it seem like we are selling good products that you must have even tho its a load of crap lol. “note for you, if you see a company owned by Jeffrey Sia, remember that he is a dirty capitalist with a very good marketing team lol”

Anyways, this post is getting too long, let me know what you think about capitalism as an idea. I’m guessing if you’re reading this blog you’re more skewed to being a capitalist rather than a socialist. Or what do you think about socialism. Which one do you prefer? Do drop me comments or emails as I’m more than happy to read them.

If you like this page, do like on facebook, just click on the little like button on the right hand side of the screen or follow me on twitter!!

Next post on Thursday.

Sunday, May 8, 2011

The Unintelligent Investor's Definition of the Week: Blue Chips

Blue chip

Oxford dictionary definition: denoting companies of their shares considered to be a reliable investment, though less secure than gilt-edged stock

Unintelligent Investor’s explanation

Did you know that the term blue chip actually came about because back in the days, blue coloured chips used to be the chips with the highest value in casinos. So in the stock markets, blue chip stocks refer to stocks that are of highest value.

I think in general, blue chip stocks are what people buy to take less risk. They are usually big companies, with expensive share prices and are unlikely to go bankrupt anytime soon. They don’t usually provide you with a high capital gain but has a price that is less volatile. These are of course stereotypes and might not be applicable to all cases. People who buy blue chip stocks tend to invest in them for a longer period of time, as oppose to traders who get in and out of penny stocks really quickly.

I found an article about a year and a half ago and it is about how to have a portfolio that is safe and consisting mainly blue chips. Luckily I still have it so I’ll copy and paste it down below.
The complete moron's guide to top 10 stocks
October 17, 2009

I was listening to a high-profile financial personality ''guesting'' on the radio the other day and he was asked by a caller what 10 stocks he would pick in a long-term portfolio and, amazingly, he had no answer.

Instead he fluffed out a couple of totally inappropriate mid-cap stocks that would have got you into a lot of trouble.

It turns out a lot of people we think are financial ''professionals'' have never given, are not licensed to give and do not know how to give, advice; they just crap on from the sidelines without actually having an opinion on the core, bottom line, ''nothing else matters'' skill of the finance game, answering the question "What do I buy?" It's amazing how much noise there is in this industry around that question without anyone actually getting down to answering it. I am more than guilty myself.

So let's make a start. What 10 stocks do you put into a long-term portfolio?

This is Stockbroking 101, chapter one - "The Moron Portfolio".

The moron portfolio is not called that because only a moron would pick it; on the contrary, it is so labelled because any moron could pick it. It is a portfolio designed to protect financial professionals (definition: people who have a licence to give advice) from legal action, and when it comes to legal action the main concern is that they have to have a reasonable basis for their recommendation.

On that basis the moron portfolio picks itself, and for the timid financial professional, here is the process. You print off the ASX 200 in market cap order and, starting at the top, pick the biggest stocks that you can't be sued for recommending. You do this not by picking the best stocks but by eliminating any stocks that you could be sued for recommending.

The 10-stock moron portfolio includes the four banks. Most safe advisers quite rightly recommend holding all four banks because there are more important games in town that finessing which bank. All will do. Then it's BHP, Rio Tinto, Woolworths, Westfield Group and Woodside. Anyone who likes gold would add Newcrest; finally, it's a toss-up between QBE, CSL or Macquarie Group.

QBE gets into most portfolios because it is well managed with a strong balance sheet; for a defensive stock it has steadily outperformed the market since it listed. CSL is a great stock but needs a bit of timing; it sometimes has long periods in the cold.

Macquarie Group is simple. If the market goes up, Macquarie goes up more. If it goes down, sell, and quick.

The only stocks that don't get an automatic pick in the top 10 include Telstra and Wesfarmers. Telstra because the only sex it offers is a yield, and by rights no one should invest in equities for that.

Equities are for growth in capital - ask any Yank - and if it wasn't for the performance of a protected monopoly called the Australian bank sector that has spoilt us into thinking we can have income and capital growth, the Australian retail investor would realise that.

High yield means low growth, which means a dull share price. Utilities, regulated gambling, property trusts, food, infrastructure, health care. I rest my case.

Wesfarmers doesn't get in because it's too complicated for most people. You'll find brokers very divided on Wesfarmers. Most are cautious about the big lash on Coles. That uncertainty, and the fact that it has about 10 different business units, puts it in the too-hard basket because no one really knows what it does. But the main bits are cyclical and I reckon that's enough at the moment.

There is a tail of stocks you might be recommended after that. Origin and Santos, AMP, IAG, Suncorp-Metway, Amcor, Qantas and Stockland, Foster's, Brambles, Orica, Lihir, Oil Search and AGL.

That's about it. You'll know when your adviser isn't a moron. He's the one recommending a stock I haven't already mentioned.

Marcus Padley is a stockbroker with Patersons Securities, the author of the Marcus Today daily stockmarket newsletter and the book Stock Market Secrets, available at marcustoday.com.au

Source: The Age

Thanks for reading! Do drop me comments or emails if you have something you wanna talk about, it don’t have to be related to blue chips at all. If you like the site, do click on the little like button on the right hand side of the screen to like this page on Facebook. Follow me on twitter if you like as well. Next post up on Tuesday!

Friday, May 6, 2011

Ka Ching

Hey there,

First of all I’m very sorry for the late post. I was out pretty much for the entire day yesterday and had to go to hospital early this morning. The post was already half typed but not quite done yet. I just finished typing it so here it is!

I watched a short half hour program on tv last night and they were talking about virtual currencies. See in Australia, cash is being used less and less. Everybody has an ATM card which you can use to pay for things using an eftpos terminal. People can choose to pay by Visa, Master, Amex, etc. Visa card holders can use Visa Wave and Mastercard holders can use Pay Pass. Soon, we’ll be able to pay for things with our phones. Even vending machines selling things that are less than 3 dollars has a credit card reader embedded in them.

So with all these technology around, and physical cash being used less and less, so if this trend continues won’t all currencies in general eventually become virtual currencies? How much money we have will just be a number in our bank account.

For quite sometimes now virtual currencies have been really big and are getting bigger. In China, something called Q coins are used so widely that it is actually affecting the RMB so much that the Bank of China intervened. In all sorts of games on Facebook or on the iPhone, we can exchange cash for these virtual credits and use them to purchase items in the game. Facebook, which is big enough to be the 3rd biggest country in the world, has something called Facebook Credits, which can be used to buy virtual goods in many games and apps on the Facebook Platform.

In some parts of the world, there are farms that grow WOW characters. People actually play all day and night to get a character that meets a client’s exact requirements and are sold to them. This is actually a massive industry.

There are also people that use these kinds of virtual currencies to get around gambling laws. So they win in games and earn these credits. They then go to a “separate” company and that company will exchange their virtual credits to proper money.

I’ve never played WOW myself, and the only virtual currency I’ve ever bought was some diamonds on the iPhone game Froggy Jump. It was a one off thing, I got lazy to level up the old way. So I don’t really have experience as to how they work or how big they are.

I’m just typing this to I guess think about how virtual currencies is going to impact proper currencies. Can something like Facebook Credits become so big that they might as well be a proper currency? And when that happens is it worth holding highly inflated currencies? What if people in Zimbabwe rather have Facebook Credit for their goods than their Zimbabwean dollar? What do you think?

Do leave me comments or send me an email. I'm more than happy to read them. Click the little like icon on the right hand side of the screen to like the page on facebook or follow me on twitter. Thanks!

Tuesday, May 3, 2011

Happy times

Hey there,

I was in the O&G outpatient’s clinic when I saw the breaking news. Osama Bin Laden killed. Unfortunately the tv in the outpatient’s clinic had no volume on so I could not hear what they were saying. I was really confused when I read that headline, then I got a bit sceptical, thinking it must be a mistake, it must be a body double or something (goes to show how much faith I have in the American Intelligence, cant blame me after watching so many movies about how dodgy they are).

Got home after being in the hospital from 8 to 6 and finally got a chance to read the news properly. In fact I had just watched President Obama’s address. I have to say I thought his speech was very impressive. I like how he ended basically saying America is still one of the awesome-st country. So what do you think is gonna happen next? Some say the world is gonna end because of the impending retaliation from the Al-Qaeda. Anyway, I don’t know much about investing or trading but I know even less about world politics. So I’m gonna try and relate this event to the markets =D

So what happened to the markets after this news was released? The ASX 200 regained its losses and closed flat. US stock futures rose, when writing this, NYSE was not open yet so soon we’ll see if American indexes moved upwards as well. Nikkei 225 finally went above 10 000 points and closed at 10 004.20. FTSE 100 is currently slightly up. So I’m guessing the markets are generally happy about the news?

That is the thing about the stock market, a lot of it is sentiment. In movies, after the supervillan is killed, the sun suddenly starts shining, everybody is happy and the world is all of a sudden a better place. This is not a movie tho. The supervillan is killed but is the world economy all of a sudden brighter? What if the Middle East gets more and more unrest because of this? I don’t know, but I guess when people are confident they buy and a reaction to such news is probably confidence.

Don’t get me wrong, I agree when the President when he said justice has been served. But what is next? Guess we’ll find out.

I know this is rather sensitive news, but what do you think about it? Do drop me emails or comments I’m more than happy to read them. If you like the site, click on the little like button to like the page on facebook, or follow me on twitter! Thanks!

Sunday, May 1, 2011

The Unintelligent Investor's Definition of the Week: Hedging


Oxford Dictionary definition: protect (one’s investment or an investor) against loss by making balancing or compensating contracts or transactions.

Unintelligent investor’s explanation:

Just as the Oxford dictionary has beautifully defines, to hedge is to protect yourself against loss. I think any investment bank or fund and most companies hedge themselves against various types of losses. Plus, they can hedge themselves against almost anything. Insurance companies can hedge themselves against bad weather by buying certain options, coal companies can hedge themselves against dropping coal prices by buying futures, airlines can hedge themselves against raising fuel prices by buying options. Banks can hedge against bad debts by doing credit default swaps. They can hedge against the dropping US dollar by buying gold or against inflation by investing in REITS. We can hedge ourselves against loss of income due to injury by buying an income protection insurance policy. And the list goes on.

Maybe the best way to get our heads around hedging is by thinking of it as an insurance policy. I’m sure most of you have bought some sorta insurance policy in your lifetime; healthcare insurance to protect you in case you get sick, car insurance in case you get into an accident. For the price of the premium that you pay and the excess, you get to hedge against whatever your policy protects you from. If you don’t get sick or get involved in an accident, well you lose money in the form of that premium that you have already paid.

So if hedging protects your portfolio against losses, why not hedge against everything? Well simply because it would cost way too much. Imagine as a teenager, buying your first car, how much was your car insurance premium then? Can you still afford to buy a life insurance after paying for your car insurance? Is it worth buying life insurance at that age? I don’t know what do you think?

I think it all comes down to risk management. If you hedge too much, you eat into your net profit, if you hedge too little, you put a big chunk of your portfolio at risk of big losses. It is very much a balancing act that takes years of experience to learn or master (if possible).

So if your portfolio hedged from certain risks? It is worth thinking about hedging at our level of knowledge or exposure (which is minimal)? Do leave me comments or send me emails, I am more than happy to read about what you think, even if you think the post is totally crap, let me know.

Thanks for reading! If you like the site, click on the little like button on the right hand side of the screen to like the page on facebook, that will help me a lot and you’ll stand a chance to win some free gifts! Follow me on twitter if you have an account. Until next time, happy trading!