On My Analogies (a.k.a. Oh Eff I got a Comment!)

Versed on November 12, 2007 by The Rational Investor

District Streets Covered Investors Edge, Sales for Non-salesmen

To my one reader, thanks for your comment.

If you want to be technical about it, there are “free agents” for college ball: high school players. This does break the analogy though in that Wooden would have to wait until the next season to pick the agent up. While in the market, the rational investor can pick up a free agent any time of day.

I think titling the strategy with “John Wooden” sticks better than “Phil Jackson” simply because Wooden is legendary and likable. Phil Jackson’s marketability is questionable and likability is subjective at best (only people from Chicago and LA like him).

All analogies have holes and the point of an analogy is not to be accurate and precise. As an example, you can also argue that coaching the basketball season doesn’t exist during the summer, whereas trading in the stock market happens year-round. Also, Wooden, if you read his shitty book, is a man that believes God intervenes in his success. This is something I strongly disagree with as this is an ingredient that doesn’t fall into the cookbook of rationality.

Please don’t get caught up in the details of an analogy on any of my verses. The core message of the basketball coaching analogy is to demonstrate that strategically investing in the short-term takes agility. A trait that falls into the category of coaching basketball (or leading a team in anything else successfully).

The point of the analogy is to use a more commonly-known schema to help investors think about and, more importantly, remember how to invest better, investor.

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The John Wooden Strategy

Versed on September 27, 2007 by The Rational Investor

District Streets Covered Investors Edge, Financial Panther

john wooden The Rational Investor Loves Coaching Basketball

To my loyal readers, my deepest apologies for not writing. To my blog, you’re starving. A lot has gone on in the market, and I haven’t spent much time covering it. I’m a rational investor, but an irrational writer. My sincere apologies.

Anyway, today I want to cover something very important to me. It’s a strategy I hold dear to me that I use when I’m short-term trading. I call it my John Wooden strategy.

The first step of the strategy is to rally up my players. In this step, I find stocks that I see as potential superstars. These are usually 10-15 stocks that I know a shitload about. I know how fast they can run, what the risks in their attitude are and how they fit into the overall performance of my team.

The second step of the strategy is to pick my five starters. These are the best of the best. These are the five stocks that are taking me to the championship at the end of the year. The fastest and top performing players will get me there.

The third step of the strategy is to pick my sixth man. This is the stock that’s good enough to start, but is more of a swing man. He performs well late into the game. Whenever one of my superstars gets into foul trouble, or starts performing not how I expected I put him on the bench and bring in my swing man.

The fourth step of the strategy is dealing with the rest of my bench. I watch them very closely during practice. If they look better than I thought during practice they’re my new sixth man and whoever is performing the least is going to get subbed with this sixth man as soon as possible.

The fifth and last step of the strategy is to know who to trade. I’m constantly scouting out players in the pool of free agents. When my bench gets boring, I need to look at what free agents are available out there that can bring my team back into performance mode. Anybody that’s underperforming during practice on my bench, gets traded and I sign up a free agent that I find attractive.

That’s it. A very dynamic environment. My job as the coach of this team is to recognize talent, understand what works and what doesn’t and manage my team efficiently to win games and make it to the championship.

The rational investor lives and dies by the John Wooden strategy. Keep your strategy simple and rational, and the market will reward you, investor.

“Failure is not fatal; failing to change will be.”
- John Wooden

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Rational Quotables: Warren Buffet On Rationality

Versed on September 4, 2007 by The Rational Investor

District Streets Covered Rational Quotables

“Nothing sedates rationality like large doses of effortless money.” - Warren Buffet

pretty interesting pic

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I’m 50% Salvador Dali and 50% Bertrand Russell

Versed on September 4, 2007 by The Rational Investor

District Streets Covered Investors Edge

half-n-half dali dawkins Motley Fool released an article a few days ago titled “How to Buy Low and Sell High.” The article argues that in order to buy low and sell high you need to discriminate a company’s value and establish a margin of safety. You can call that margin of safety whatever you want (price based on future free cash flows, moats, stocks beaten down by bad news). In other words, you want a company that can be bought at a discount and then sell it at the price you think its worth. Of course, easier said than done. My favorite line in the article is”Finding that value is part art and part analysis.” One part art, one part science.

A long time ago Warren Buffet said something along the lines that he was “15% [some guy] and 85% Ben Graham.” Unfortunately, I didn’t didn’t have the opportunity of growing up gotti by being of a student of and working for Ben Graham so I’d be lying if I said I was influenced by him. Instead, I look to the two “greats” that have influenced the right and left sides of my brain. I’m 50% Salvador Dali and 50% Bertrand Russell.

The first time I walked into Salvador Dali’s art gallery it blew my fucking nut hairs off. The second time I walked into the gallery it blew my fucking boxers off exposing my fucking bald nuts. I’ve been been to the Louvre, the Prado, the Met, etc. Nothing has come close. Psychoanalysis, scientific method, theater, lust, the metaphysical, transcendent cubism! What other “masters” could capture these recurring themes with the same detail and precision using the brush? The first time I read Bertrand Russell’s “A History of Western Philosophy” my opinions of philosophers changed. They went from self-righteous morons to self-righteous geniuses.

Dali taught me the value of thinking artistically. Doing so helps me better understand my emotions, fears and desires. At the same time it clarifies for me what people will get emotional about.

Russell taught me the value of thinking rationally. Doing so helps me better understand truth by evidence.

The mental models these rich pricks established for me are what fuels my artistically rational value investing strategy.

Dalilean thinking allows me to “paint” what a company’s value is worth. As a simple example take the introduction of Apple’s (AAPL: 223.02 +1.80%) iPhone. With this new product I can paint a picture of what I think is going to happen to Apple’s stock price based on its future earnings. The painting’s all fiction, but it represents thoughts that I can’t put into words. If the finished painting looks beautiful to me, I begin to look at the company rationally using the gifts Bertrand Russell blessed me with. Here my mathematical brain kicks in and looks for an intrinsic value of the company. Through financial analysis, I can write if the intrinsic value deviates from the stock price. If it does, the numbers are as beautiful as my painting and I’ve established a margin of safety. The stock is now attractive to me.

As a practical example, I used this strategy when picking BE Aerospace (BEAV: 27.76 +0.29%). The news of high numbers of wide-body airplane orders means high numbers of airplane cabin orders for BEAV. I painted a more elegant picture of this in my head at the time. I then did a discounted cash flow analysis on the stock and priced it at $44. At the time BEAV was trading at ~$26. The numbers were as beautiful as the painting. I got in around $30 and kept increasing my position up until $35. As the price kept going up I started selling since my margin of safety threshold started going down. I was completely out of my position at $42 because my margin of safety was essentially non-existent at that price. The stock price has deteriorated since then. Some people may call this luck, but sometimes mixing art with science produces luck especially when trying to find value, investor.

“There is more madness to my method than method to my madness.” - Salvador Dali

“If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.” - Bertrand Russell

white guy lands himself a fine asian trophy wife

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Listen to Grandpa. He Knows Best.

Versed on August 27, 2007 by The Rational Investor

District Streets Covered Investors Edge

Simple, priceless, rational advice.

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Food for Thought: Five Types of Investors

Versed on August 22, 2007 by The Rational Investor

District Streets Covered Financial Panther

asian luh! Yesterday, while I was finishing up eating my Chiquita (CQB: 15.58 +0.52%) banana, I noticed that most investors are pigeonholed under growth or value. After taking a handful of Diamond’s mixed nuts (DMND: 41.74 +2.78%) (a rainbow of walnuts, peanuts and cashews bundled into one tin can) and throwing them into my mouth, I began to think that the terms “growth” and “value” are too reductionist to capture the essence of the philosophy of an investor. After downing a pint of my Sam Adam’s Lager (SAM: 51.74 +1.15%), I came up with the following pigeonholes:

1) The Microeconomist
Ask the Questions: Where’s the company in its growth cycle? Where’s the company headed in its growth cycle? What do the financials look like?
Religion: There’s a direct link between the value of the investment and its financials.

2) The Brand-name Buyer
Ask the Questions: How well known is the company? Has it passed the test of time? How much cash is it expected to grow in the future? How much cash will I see in the future? Does the management know what it’s doing with my invested cash?
Religion: The moat keeps companies alive in good times and in bad. Famous grandpa Warren Buffet, summed it up nicely: “Your premium brand had better be delivering something special, or it’s not going to get the business.”

3) The Technocrat
Ask the questions: What price is the stock at? What volume did it go to? Is that a base forming? How many shorts are out on it?
Religion: Time and history have proven that investors react the same way today as they did 30 years ago, and a stock’s chart is the road map of that decision making.

4) The Informer
Ask the questions: Who did Enron’s books? Countrywide Financial (CFC: 0.00 N/A) gave out how many subprime loans without asking for an upfront down payment or salary disclosure?
Religion: The market is directly affected by positive and negative news.

5) The Blind Timewatcher
Ask the questions: Is the market overbought?
Religion: Irrational exuberance makes the short seller happy.

black and white After spreading Heinz (HNZ: 46.28 +0.17%) ketchup on a Hormel (HRL: 41.68 0.00%) spam sandwich I was about to devour, I shared my list with my trophy Asian wife. She took a bite of my TIO PEPE’S Churro (JJSF: 43.97 +3.09%) and exclaimed “DWELL (sic), you forgot to include the rational investor!!!” “No I didn’t,” I calmly stated while wiping Nabisco Oreo (KFT: 29.23 +0.21%) crumbs off my lap. “Every one of those is a rational investor,” I said plopping Reddy’s Ice (FRZ: 5.40 +2.27%) into my vodka tonic made from mixing Smirnoff Vodka (DEO: 65.34 -0.56%) and Schweppe’s Tonic Water (CSG: 0.00 N/A). “As for this rational investor I like to take the best out of all philosophies. I like investing in companies with strong financials. I like buying companies that make the products that I use from day to day. I like following a chart so I can determine when’s the right time to buy in the short-term. I like hearing about news so that I can make a quick buck. I like knowing when not to buy if a market’s overbought. But most of all, I like buying all these companies at a discount.” She replied, “Oh.”

Fall into the pigeonholes of rational investing, investor.

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Timeless Money Rules, Abridged Version

Versed on August 21, 2007 by The Rational Investor

District Streets Covered Financial Panther, Outside Verses

white nigz with asian In “46 Things I’m Glad My Mom Didn’t Teach Me About Money” I covered almost 50 things some middle-aged woman just learned about money. Some were good, alot were dumb, but they were all part of her “money” philosophy. Well 46 things are too hard to remember, especially when the philosophy behind them isn’t crystal clear and the points are chosen arbitrarily. Luckily, the folks at Money Magazine read my blog and decided to copy the investing tips I provide in them to establish 20 money mantras. Even though those assholes didn’t source me, I’d advise you to read the list and practice every single one of them. They offer us the 20 Timeless Money Rules . Summed up as follows:

1) Be smart about the risks you take. [”Take calculated risks,” “Don’t follow the crowd,” “Borrow responsibly”].
You need to risk in order to find good returns. Following the crowd, like all things in life is lemmingl-ike behavior and not rational investor material. Only borrow on potentially appreciating items (a true asset).
2) Diversify, but don’t diworseify. [”Mix it up,” “It’s the portfolio, stupid,” “Average is the new best,” “Invest abroad”]
What to pick will be the hardest decision of them all. If you don’t know what to pick, then pick them all in an index fund. The rest of the world is piggybacking off OUR growth. Let’s piggyback off of them to get them back.
3) Save your money [”Have an emergency fund,” “Be a cheapskate,” “Pay only your share,” “Buy low”]
Shit happens, keep your money as a diaper for when shit decides to happen on you. Don’t pay for shit you can get for cheaper.
4) Don’t act like you know the future, cuz you don’t. [”Be humble,” “Practice patience,” “Don’t time the market,” “Keep perspective”]
I think this speaks for itself. No matter how many numbers you crunched or where the stars are pointed, at the end of the day you aren’t in control of shit.
5) Keep your enemies close and your loved ones closer [”Talk to your spouse,” “Exit gracefully,” “Give wisely,” “Keep money in its place”]
Run all major financial matters by your loved ones, or the ones that share your financial stake. Make sure you have shit set up to secure their future if your future just decides to become their past. Remember that they’re first, money is second.
6) Make it happen [”Just do it”]
Stop with the should haves, man up, and start making money for yourself with these rules.

Cut the bullshit out your life investor; it’s usually there to make you feel inadequate and/or to take your money somehow. Once you realize these top 20 rules apply to you and the decisions you make then, and only then, can you enter the realm of a rational investor (like most of the ones they quoted).

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The Dihydrogen Monoxide Sector

Versed on August 9, 2007 by The Rational Investor

District Streets Covered Financial Panther

In lieu of J.Nice’s Water article and that water drinking brat Fast Company Magazine (great zine for the investor I might add) wrote this article on the big business of bottled water. In a nutshell, Americans are a bunch of self-indulgent, purified-tap water buying assholes. We spent over $15billion on water last year alone. Growing up as a New Yorke and having been spoiled with the best tasting tap water my entire life, the plastic bottled water frenzy was foreign to me. Having moved to California and experiencing the best plastic bottled-up people in my entire life, the bottled water frenzy has now terrorized my refrigerator (thank you California girlfriend).

OK, so you now know that Californians love plastic to hold their water as well as their tits up. How can you profit from it? The article mentions you can invest in the big brand names like Pepsi (PEP: 64.36 +0.33%) and Coke (KO: 54.18 -0.51%) with their Aquafina and Dasani brands, but I’m thinking beyond that. I want the guys who are giving Pepsi and Coke their unfinished cracks. I want the suppliers not the dealers. These are the guys who’s primary business is the most abundant molecule on earth.

Check out Veolia Environnement (ADR) (VE: 32.00 -1.30%). Even though they can’t spell the word “environment” correctly they can spell net income. Their water business is experiencing mild organic growth right now(nice and safe water play). They are the best of breed right now for water companies. If you have a hard-on for more risk and water you may want to try Pennichuck Corporation (PNNW: 21.31 +0.19%). Or if you just want exposure to the overall water market try PowerShares Water Resources (ETF) (PHO: 17.20 -0.12%).

The biggest organ in our body, despite popular belief, is water. We, as primate-brained, self-indulgent water-based organisms, typically have a fixation towards what we’re primarily made of don’t you think? Maybe it’s just circumstantial evidence, but the numbers in the Fast Company prove my claim. Why not profit from it, investor?

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Cramer Rips a Pubic Hair

Versed on August 6, 2007 by The Rational Investor

District Streets Covered Outside Verses

I’m not sure what he’s so pissed off about. He probably lost a lot of dough this past week. I lost around $1,000 — I can imagine what he and his friends are losing. I’m also unsure how much of this is an act.

Anyway, the people losing their jobs and their homes probably deserved it. Bad investments = bad consequences, simple mathematics.

The rational investor keeps his pubic hair finely combed, unlike Cramer in this video, investor.

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The MC Squared Sector

Versed on July 20, 2007 by The Rational Investor

District Streets Covered Investors Edge

Big ass oil rig The MC Squared Sector (Energy sector for you simple minded investors) is blowing the fuck up. Not only has the S&P 500 Energy index undervalued the sector, but so has the WSJ.

I’ve already RECO’d the Vanguard Energy ETF (VDE: 84.71 +0.05%) a couple weeks ago and shit has jumped 20% since then. If you have bigger balls you should try Schlumberger (SLB: 64.10 -0.59%), makers of high-quality drills that make the earth cum with texas tea and black gold. The mega-geeks in their management have already doubled the stock’s price, and shit is still considered a bargain based on analyst estimates over the next 12 Months. On top of that the company just broke earnings estimates this past quarter. On top of all this good news, check out the massive dickridation of the stock on caps. If VDE is too golf ballish for you and you have balls the size of cantaloupes you may want to try Bolt Technology [[BTJ] instead, makers of the equipment that helps prick open the earth for oil. If you have balls the size of plums maybe OYO Geospace (OYOG: 49.72 -0.12%) is for you. Plus, the name looks funnier (let’s test out Cramer’s 80 120 rule on this one).

Why’s the energy sector doing so well you ask? Simply put, the Reds in China and the rest of the world need oil to keep their economies growing at the pace they are going at now. More demand = higher prices, elementary classical economics. So, you know where your risks lie. If China’s economy starts slowing, your investments are fucked.

The rational investor is on the dick of everything that has to deal

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