Archive for October, 2011

Can Dividend Investing Lead You To The Top 1%? #OWS

By: ispeculatornew | Date posted: 10.19.2011 (4:44 am)

These days, the top 1% vs. bottom 99% debate has continued to rage on as Occupy Wall Street (#OWS) continues to spread around the world. Its interesting but I think the debate often becomes a bit out of touch with reality. Bill Gates is not the typical 1% person, far from it. The typical 1% earner makes less than a half million per year which can seem beyond reach at times but it’s not as impossible as you might think.

I thought the interesting question of course was:

“How much would a passive income investor need to hold in order to be in the top 1% of earners with only a dividend portfolio?”

Given that I’m told that the top 1% barrier is located at $347,000 per year in the US and assuming a dividend portfolio that yields 5%, you would need a portfolio worth $6,940,000 in order to be part of that elite group. I know, it seems so far off!

Steps To Get There

Knowing that you can start a dividend portfolio with as little as $5000, and you would ideally be looking to build a sustainable dividend portfolio in a similar way to what we did a few weeks ago in the Ultimate Sustainable Dividend Portfolio. In case you forgot, this portfolio currently yields 2.86%, we will assume that the portfolio returns 8% per year (including dividends) which will all be reinvested into the portfolio. Let’s assume that the holder has a good job (100K?) and can reinvest $2000 per month into that portfolio (increased 2% per year to account for inflation).

From the start, this $5000 portfolio yield $143 per year…gotta say, it’s not encouraging!

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At this point, you could probably switch into a higher yield dividend portfolio that would grow more slowly but would yield much more. You could target a 6% dividend yield which would yield you over $226,000 in annual income.  In terms of assets however, that would clearly put you in the top 1%.

There Is A BUT

I know, I know, I am talking aboout 30 years down the road and those dollars are likely to be worth a lot less than today’s dollars. I would still argue that most would be very happy with a $226K annual passive income from their dividend portfolio. Let’s start by looking at what is required to get to this point.

Let’s Recap What You Need

#1-$5000 initial investment (fairly easy?)
#2-A monthly contribution of $2000 (I know, this is tricky and will be a challenge for most, the trick is to increase it over time)
#3-A 8% annual return (seems reasonable, especially with a model such as our sample portfolio)
#4-Consistency over 30 years (like so many other things in life, consistency is key).

Is it a challenge? Absolutely, but it’s certainly possible right?

Taking It To The Top 1%

In order to get to that 1% (225K only gets you to the top 2% or so), you would need to increase your assets and income by

Taking More Risks (especially when you can afford to do so in the middle to late years)
Starting New Ventures such as building a business (which will help you not only accumulate your 2K but can be sold for a significant amount down the road.
Real Estate: Once you are able to get enough assets, you could leverage those to buy property that will generate cash flows down the line and possibly be sold.

Is The Top 1% Really That Far Out Of Reach?

I’m not saying it’s easy by any means, far from it. But I think that in this digital age, there are a number of ways to get there, it is mostly about having a clear plan, working towards that goal and being systematic over a long period of time. It’s not easy by any means but it’s certainly not out of reach either. I’m glad to see that most Americans agree that that it is within reach:

Are You A Forex Trader Wannabe?

By: ispeculatornew | Date posted: 10.18.2011 (5:00 am)

As internet users interested in finance, you are certain to have come across a large number of ads, posts and information about forex trading. Why? It is one of the most leveraged ways to trade the markets and is one of the more lucrative activities for brokers. Why? Because it’s fairly easy to convince the general population that they stand a chance trading currencies. Why? Who thinks they have an opinion about where the US dollar is headed? While you could probably say that very few investors would have a strong opinion on a stock like Google, most do have an opinion about gold, crude oil and currencies such as the US dollar.

How Do They Convince Users To Sign Up?

Just look at some of these attractive features:

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The required capital and initial investment are probably the deal breakers. You can basically sell the possibility of trading $10,000 worth of currencies with only $100 in your account. That means you can make fortunes with small movements. Of course it also means that you can be wiped out if that same movement goes around you but that is usually not as clear:)

Forex, Greatest Market On Earth?

In many ways, the forex market is much better than others. It is the most traded market in the world in terms of notional, never runs out of liquidity, always trades at very tight spreads and good traders can do well. In fact, someone right on Forex can make billions of dollars as has been done many times including the famous George Soros trade on the British pound. To be fair, thousands are probably making a killing every day trading forex.

Forex = Casino?

I would however bet a lot of money that almost none of the clients of these small brokers that we often hear about on the internet are making profits. Why? In many ways, I think trading forex at these brokers is similar to playing a game like Black Jack in a casino. You can know how to play, have ability and be disciplined. But over time, the house will end up winning. In this case, the house is the broker. How do they do it? While the brokers do not charge commissions, they let you trade at wider spreads. It does not have to be much. If the broker takes only a few extra fractions of a % than what it can get on the market, it is basically making “risk-free” profit.

How To Trade Forex

It’s easy to conclude that Forex trading is easy. It’s not. The most critical part is to make sure that the broker you are using has very tight quotes, which over time will make a world of difference. Also, stay away from any “fail safe forex trading method”. It’s crazy that some people fall for this. Believe me, those who have such algos figured out (there are some of course), will not be selling their software for a few hundred dollars. You can certainly be inspired by other trading strategies/methods that you hear about but in th end, your success will depend on your trading. Finally, do not extend your luck. You should always trade by making sure that you can preserve a large portion of your capital. There is no way that a 2-3% move should even come close to wiping out your capital.

Your Experience

Have you ever tried trading Forex? Have you had success doing so?

How To Recover After Bad Trades?

By: ispeculatornew | Date posted: 10.17.2011 (5:00 am)

It happens to all of us, you start trading either with a long term vision or shorter term trades such as our long and short technology trades. Then, after a few good ones, things turn sour. It doesn’t have to last years or even months. Sometimes, just a few consecutive bad trades are enough to create major confidence issues. Why? I think we’d all agree that trading psychology is a huge part of any success, especially over the long term. We are all different and while I have been fortunate in avoiding big losing steaks in the past few years, there have still been times where a couple of losses got me rethinking my entire strategy.  Over the years, here are some of the strategies that I have used. They are clearly not perfect and I’m sure that I’ll find more over time, but these are mine, I’d also love to hear about yours!

Take Some Time To Cool Down

Personally, I know that the worst thing that I can do is drawing any type of conclusion right after it has happened. Trading is emotional and acting right after a bad trade occurred would rarely turn out well in my opinion. Some like to trade right away, often risking more in an attempt to “win back” those losses. That is rarely a good idea. If you have been a regular reader here, you know that I usually open new trades on Monday’s following trades being closed out. There have been a few exceptions, often following a few bad trades where I wanted to take an extra week to think it through.

Do Not Panic

Unless you bet the farm on one trade, which would be plain stupid, you will live to trade another day which is what it’s all about anyway. You will get a chance to work on your trading, to improve and make some better trades in the future.

Determine The Cause Of Those Bad Trades

It’s always interesting to try to find out why a trade did not work out. Interesting as in VERY CHALLENGING. There are so many errors and it’s always tempting to credit our good trades to our “smart trading ability” and bad trades to everything except our ability:)  And I should mention that you should also do this on good trades also!

Are The Same Mistakes Occurring Over and Over?

The most important thing is to notice if some of these causes are occurring over and over and to make adjustments to those that are. I personally have found two major causes that were causing issues in my trading, both that have been discussed on my blog. First, I failed miserably in shorting what seemed like overvalued stocks that had strong momentum. Second, I had issues trading towards the end of the year because I was going after short term gains (since I close out open trades at the end of December). I did make adjustments to both of those and thankfully, that has helped tremendously this year.

Avoid Getting Too High Or Too Low

It’s always tempting after a few good trades to start getting overconfidence, to start bragging to friends and family about your success and start doubling down. DON”T DO IT. Like so many other things in life, you will end up in a emotional roller-coaster. Try to stay grounded no matter how well or how badly things are going. Trust me, you are likely to have some glorious moments but also some very difficult ones from a trading perspective, there’s no need to take your whole life onto such a ride.

Get Back At It

Taking a few days break can be a good thing because it gives you perspective. Not trading for several months is usually not such a great idea. If you trade over several years, you are likely to have several good streaks but also a few more demoralizing ones.

Don’t Try Too Hard

It becomes tempting to give extra effort, time or thought to trades when you get back it. Don’t. Trying too hard is likely to only get you into more trouble.  Apart from the few elements that you might decide to change in your trading strategy, you should get back to your business as it was. Being more or less aggressive or analyzing a trade for days before opening it will only make it more difficult.

What Are Your Methods?

I would love how you react when a few bad trades occur and how you’ve managed to get back your confidence.

Catching A Falling Knife Part III: Netflix (NFLX)

By: ispeculatornew | Date posted: 10.14.2011 (5:00 am)

In the past few months, we discussed some of the costs and benefits to buying “falling knives”, stocks that seem to be heading in one direction only. There was Research in Motion (RIMM) and British Petroleum (BP) and while both still are trading at fairly depressed prices compared to their highs, it’s fair to say that buying BP has turned out into a very good deal. BP is almost 50% higher while RIMM continues to move lower with no end in sight. This week’s downtime will only hurt a company that is down and almost out.

Today though, I’d like to discuss Netflix (NFLX), a company that I discussed a few months ago with no clear opinion but has been in free fall in recent months. In fact, 3 months ago, Netflix reached its high at $304.79! Since then, the company has lost over 60% of its value! Some had said from the beginning that the stock was too expensive and sold it short. That turned out to be a bad decision for most as they shorted ahead of time and ended up losing their bet severely. Since July however, Netflix has been absolutely destroyed.

What In The World Is Going On?

As you can imagine, there are several factors to blame for this sudden and accelerated decline.

Major Screwups: To say that Netflix has screwed up in recent months would a major understatement. The company came out with a 60% price increase in what is still perceived by many as a recession, which was not well received, then surprised and enraged its customers by announcing the split of its physical and streaming companies as the dvd shipping business would be spun out as “Qwikster” and operate independently. The feedback was so bad that after weeks of complains and public relations nightmares, the company ended up reversing course a few days ago and cancelling those plans. The harm was done however and consumers will certainly have limited trust for Netflix in the future.

Increased Competition: Almost every “platform/website” is working on its own solution. Not only are Amazon (AMZN) and Apple (AAPL) now very much invovled in video but so are companies like Microsoft (through the Xbox), Rokio, Sony (through the Playstation), etc. That and the price increases have resulted in slower growth with even Netflix having to ddiminish its subscriber forecast by 4% (to 24M) for the 3rd quarter.

Increased Costs: It remains unclear how much Netflix will have to pay in the coming years to continue offering what is generally the best streaming video choice out there. Content producers are getting increasing power when selling their rights because of the multitude of platforms that want to have the bigger brands available to their consumers. Those costs have been under severe pressure in recent months with many deals to be renewed. Getting key content will be a major key for Netflix and keeping those costs under control is critical.

Valuation

Revenue growth might have slowed but it does remain very solid and I do think that its numbers still look solid. Estimates range quite a bit but the company is expected to bring in close to $5 in earnings per share this year and around $6.50 for next year. That implies Netflix trading at a forward P/E under 20 which screams bargain in my opinion. Revenue growth might be slowing down but I do think that it still has strong potential.

 

Is Netflix The New BP Or The New RIMM?

Personally, I think that while Netflix is in a situation different from both of those, it is much more similar to BP with a solid company screwing up in a big way but with a strong underlying business. Netflix is facing a lot of competition but it does have great business partnerships both with distributors and content producers. The brand is certainly damaged but over time, if they stop making mistakes, that could make a huge difference.

Also, I think that Netflix’s early moves to take market share in Canada and Latin America will pay off as competition is months or years away and that will provide a good opportunity for Netflix to gain a solid position. There are clearly hurdles but I do think it’s still a great play. Another good point is that even yesterday, Netflix reached an important agreement with the CW network to stream its shows. Agreements like this will end up making a big difference in the subscriber growth it can achieve.

Overall, I do think that Netflix looks attractive at its current valuation, how about you?

5 Dividend Stocks Too Good To Be True?

By: ispeculatornew | Date posted: 10.13.2011 (5:00 am)

When you hear something that seems incredible and you think that you’ve found a great deal, it’s usually not. That is very much the case for investing in general and dividend stocks to be more specific:) Just think about Yellow Pages (YLO) and how it ended up crumbling or how FTR continues to be at the top of our dividend rankings but looks a lot less attractive under the surface.

Today, we took a deeper look to find some lesser known stocks that could be solid dividend plays. As is always the case, we encourage you to do further research on these names and will also likely be discussing some of these in our free newsletter, that you can sign up for here:



Back to our names! We started by using most of the 20 things that we look at when judging dividend stocks and dwindled down from thousands of names to 5! They probably have some flaws that we will find but for now, they look like great dividend plays. Here are some details of these 5 stocks:

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Let’s take a look at the patterns of these companies in recent years:

Terra Nitrogen Co LP (TNH)

Southern Copper Corp (SCCO)

TAL International Group Inc (TAL)

Navios Maritime Holdings Inc (NM)

Wayside Technology Group Inc (WSTG)

There Is No Free Lunch

As you can see, these companies have not been the most consistent dividend payers. That is a good part of the reason why you can get such high yields for companies that do appear to be healthy. I’m a big believer in finding stocks that can pay steady, sustainable dividends and increase those over time. These companies do seem to have the potential to achieve such records but they don’t have the history to back it up.

They Do Look Promising Though

All 5 of these stocks are paying a dividend that they can afford (reasonable payout ratio), have increased their total payout, sales and earninggs in the past 5 years and have a solid balance sheet (debt compared to assets). Doesn’t that cover most of what we would hope for? Isn’t it possible that the market just has not caught up with these hidden treasures? It certainly is! I would be very cautious and will certainly be spending more time on these names but I would love to hear more thoughts or opinions on adding these names that all have a dividend yield of 6% or more!

Ask The Readers: Survey!

By: ispeculatornew | Date posted: 10.12.2011 (5:00 am)

Today, we would love to hear a bit more from you the readers. What you like about this blog, what you would like to see more of, etc. We hope to make this website bigger and better over time and would love to get feedback in order to make this happen! It is only 10 questions but I would greatly appreciate if you could take a few minutes to help make IntelligentSpeculator a better blog!

Create your free online surveys with SurveyMonkey, the world’s leading questionnaire tool.


Thank You So Much For Your Time, We Truly Appreciate It.

If Warren Is Buying Berkshire (BRK.B) Shares, Should You Too?

By: ispeculatornew | Date posted: 10.11.2011 (4:33 am)

Warren Buffett has had a fairly clear view on company buybacks in past decades. In fact, the company has refused seriously looking into the idea for 4 decades. That has suddenly changed and Berkshire has been buying back shares of of his company.

Why Is Buffett Now Reversing Course?

We will speculate here since we cannot ask Mr. Buffett. There are probably two main explanations. Of course, the company has a lot of liquidity and while that is generally a great thing, it also makes it difficult to achieve higher returns in the meantime. However, the main reason is that Warren Buffett is convinced that the stock is undervalued and that buying back shares is doing a service to its shareholders.

If Legendary Investor Warren Buffett Thinks BRK.B Is Undervalued?

You would certainly think that the one person that can be most accurate about the value of Berkshire’s stock would be Warren Buffett wouldn’t you?

Why Now?

Here again, there are many different possibilities but I think a strong one is that in periods of high volatility such as the current one, more investors become irrational which means more mispricings. It is certainly possible that Berkshire is one of those assets that is being priced incorrectly.

Would I Be A Buyer?

I’m rarely tempted by the fact that a company is buying back its own shares. It is also rare that the company is doing this for the first time in 4 decades though and that certainly speaks volumes. So would I be a buyer? I would lean towards yes. How about you? Any thoughts on buying Berkshire?

Trading: It’s All About Being Consistent

By: ispeculatornew | Date posted: 10.10.2011 (5:00 am)

It’s not only true about trading but certainly is very much true for anyone involved in the markets. Did anyone care about all of those great returns that Long Term Capital Management achieved once they blew up? However, being consistent does not only mean:

A) Not blowing up
B) Achieving 100% returns every year

It does mean being fairly consistent over the years, avoiding losing money as much as possible. And no, I do not mean Bernie Madoff type returns of +20% or so every year. Why am I discussing this? Because after 2 good years of trading in 2009 and 2010, I think it’s fair to say that 2011 has been exceptional. How so? Returns of nearly 100% would qualify by most measures I would think:) I am also fairly comfortable with my new decision to not open new trades in the final months of the years. It’s impossible to say how things would have gone but it has certainly helped me avoid headaches.

I will certainly continue to think about how to improve my trading in 2012 as we get closer. I am clearly not talking only about the yearly return because I would not bet much on my chances to do better in 2012. Possible? Absolutely. But highly unlikely. I would say that my chances are only slightly better than the chances of seeing my Indianapolis Colts led by Curtis Painter make the playoffs. It is highly unlikely.

To me, Warren Buffett is a model of consistency. He has not always been right but in almost every year, he has been a lot more right than wrong. For long/short trading, I cannot ask for more than that. If I can achieve one more year anywhere close to 10%, I will be happy, even if that would still be much lower than what I’ve done in the first 3 years.

What Is Consistency?

To me, trading consistently means using the same methods to find trades, to not make changes without carefully considering them. In my case, one change I had decided to make was no longer shorting high beta or high growth stocks, no matter how overvalued they seemed to be. I learned my lesson last year when shorting Baidu (BIDU) and am proud to say that I did succeed in avoiding the temptation. Believe me, there were some opportunities out there. But trading against strong momentum usually ends up being a losing trade.

The One Thing I Still Struggle With

I know, stop losses are there for a reason and they are a huge part of what makes my trading profitable. That being said, it always kills me to have to not only close the trade but also write on this blog when doing so. I might get pleasure when I close a profitable trade but believe me, a losing trade causes me much more pain than any winning trade can cause pleasure. That creates a temptation.

“What if one more day could help the trade reverse?”

I would not say that I was perfect in that regard this year, I do still have room for improvement in that and many other areas of trading (don’t get me started on non-trading flaws, I could be writing for a while)

What about you? Do you have trading rules that you have set for yourself? Are you able to respect them?

If You Could Meet Warren Buffett And Ask Him One Question…

By: ispeculatornew | Date posted: 10.07.2011 (5:00 am)

What would that question be and what kind of action you could take? I will go up first. I would ask Warren:

“If You Had Money To Invest With One Money Manager Or Fund, Who Would That Be And Why?”

I know, I know, that could technically be seen as being two separate questions but I’d take a shot with that and chances are that he would answer. I would probably want to specify that I’m looking for an answer that would exclude Berkshire Hathaway. Not that I don’t believe in the company (I actually think that might be the best dividend play, oddly enough) but simply that it would be difficult to get his honest answer if he can name his own company. Why this rather than asking him about a specific stock. Because the strength of Buffett has been consistence in finding undervalued stocks. He has not been perfect and asking him about a specific stock would it much more likely to get a wrong opinion.

I’d love to hear your thoughts on the following:

-What would you ask Warren Buffett?
-What are your thoughts on his answer?
-Is there anyone else you would like to meet to ask one question?

What Would You Rather Own, Zynga Or Electronic Arts (ERTS)+Activision Blizzard (ATVI) ?

By: ispeculatornew | Date posted: 10.06.2011 (5:00 am)

If you know gaming at all, you might think that I’m absolutely crazy for even asking the question. Maybe so. Zynga is however scheduled to turn public this year at a valuation of around $20 billion. That is almost to the dollar what Activision and EA are currently worth. That gives us a great opportunity to compare very different companies. When you consider the two giants and the fact that Zynga did not exist just a few years ago, it’s difficult to understand how this question could even be asked.

Could Electronic Arts and Activision Blizzard Be The Next Blockbuster?

Having a dominant position in a big market but being too slow to adapt to new platforms. That is what happened to Blockbuster when it failed to adapt quickly enough to compete with Netflix (NFLX). Is the same about to happen to Electronic Arts and Activision Blizzard? They have certainly turned out to be very late in social gaming and on platforms such as Facebook. Will those turn out to be fatal mistakes? I would say it’s unlikely. Most games remain bough for consoles such as Sony’s Playstation and Microsoft‘s Xbox where Zynga is not even trying to compete.That being said, there is no doubt that the much broader market that Zynga is going after is a major market that the established players did not even go after until a few months ago. Was it too late? It’s still very early to tell.

A Look At The Numbers

It is fairly clear that Zynga is a much smaller player, with most of its value depending on much higher growth and a better overall business model than Electronic Arts and Activision Blizzard. You can take a look at the revenue numbers here:

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Revenues

And earnings in terms of EBITDA:

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EBITDA

We could also compare metrics such as the number of players or others

Trend Is Not As Obvious As You Would Think

The strangest part about the new much smaller player being valued so high is that its growth seems to have taken a major hit. Why? There are a number of reasons. First, Zynga has not released many games lately and its business model is similar to a movie studio where users, and thus sales are mostly driven to new games. Can Zynga keep coming up with new hits over and over? Sure, companies such as Electronic Arts and Activision Blizzard have a similar dependance but I would argue that their users are much more “loyal” as they spend a significant amount to buy console games. Another reason is that competitors are finally moving to platforms such as Facebook. In fact, Electronic Arts has had a lot of success launching the Sims game with over 60 million users already!

Just take a look at this chart and you get an idea of how vulnerable Zynga looks like! As for comparing growth in earnings, I do think that the chart looks bad but a big part of that is:

-Zynga having a letdown in revenues and many “one time” costs (resulting in a 95% profit decline for its latest quarter)
-Electronic Arts and Activision had very solid improvements to their margins

Zynga is also much more reliant on one company (Facebook, which is collecting 30% of its sales) than the two others could probably ever become.

Does the fact that several executives are leaving the big companies for Zynga give any indication? I would think that it is clearly a good sign for Zynga.

Conclusion On Zynga?

While I continue to like Zynga, doing this research about valuation certainly concerns me. It’s rather difficult to make the case that Zynga is worth more or as much as a combination of Electronic Arts and Activision. They are certainly better positioned to profit from this new “genre” of games and that is significant. I am still a believer in Zynga but will have to think about its valuation once the official number is released. Hopefully by then we can get more data on Zynga.  How about you?