Strangest thing happened...

On Monday I was browsing through my RSS feeds and saw that ETrade's stock dropped 50% of its value. It was about 3:00 EST and I was like, "This would be a good experiment on the idiodicy of the short term market."

What I read was that Etrade (NYX:ETFC) had a bunch of bad mortgages on their books and they were going to write it off. Although, I don't use Etrade as a bank or brokerage, I am familiar with their service. Their website is cool and they get a lot of competition from other discount brokers, but come on 50%?

ETFC has a p/e now of 5.33. ETFC has millions of users and a lot of money in deposits. I believe they are worth at least $11.00. It would be a great time for a rival to buy up ETFC and merge all the accounts.

I got ETFC at $3.95. Unfortunately, I did not have a lot in my brokerage account, but maybe if I did have more I would not have bought. It is a fun learning experience. The next day it was up. I almost sold the next day but after I looked at the fundies I knew this stock was worth more than what it was selling for this day. I'm going to hold onto this and see what happens for the next month or two.

Blast From the Past

I like to read articles printed in the past that tell the impending doom of the world. It keeps my mind sold that no one really knows anything.

OPEC: Pumping all they can?

The gist of the article is that, oil prices are at a record high ($42 in 2004 but $98 today), and that it is decreasing consumer spending and increasing inflation. It also talks about OPEC's potential inability to pump more oil.

Inflation sucks. Inflation makes it so that the money you made yesterday is worth less today. The good thing is that many people can make more money today.

What the problem is is not inflation. Of course rising oil prices will cause inflation. Almost everything we produce is tied to oil. Food, transportation, packaging, consumer items, heating, and electricity (a little bit).

But inflation is not the real problem. Inflation my erode money but it does not erode wealth. The creation of wealth is what is important. What made the oil crisis of the 1970s so bad was not the prices but the shortage of supply. Without oil or any shortage of core energy wealth will not be created, and that is what truly will hurt the economy.

Some mistakes, some revelations, and some experiment

I bought more stocks this month and sold some I did not feel entirely comfortable with. I have the mindset that you don't learn until you fuck up. Well I fucked up with a few stocks. I thought I knew the companies and the industry that the stocks were in but in reality I did not. I believe in diversification but smart diversification. Don't buy shit you don't know. For example, I know nothing about clothes or fashion. The last 3 shirts I got was from my girlfriend after she got a free shirt from various volunteering. Should I buy stock in H&M because I heard a special report about them on NPR? Hell no!

In October I bought Proctor & Gamble (PG) because I thought I understood household items. I hate buying things so what would I know about them? I also bought Anheiser Bush (BUD) because I like drinking beer. Never mind that I never drink Budweiser products! If I want cheap American beer I will order a Miller Light. If I want good beer I will get a Newcastle, St. Arnold's, or a Shiner (my favorite).

Oh I'm not done. I got a little overzealous and also bought IRobot (IRBT) and Johnson & Johnson (JNJ). I read an article by Bill Gates that talked about the future and he recommended robot companies. IRobot makes things for the military but they also make that robot that goes around your house and vacuums. I don't have one but I heard it was cool. The vacuum I have is probably 10 years old. I'm also a big fan of Isaac Asimov. There should be a law against naming companies after science fiction books.

I do like JNJ but I think the company was too big for me. And after I learned from my mistakes I started to read into companies that I knew things about. I sold JNJ because I bought Isis Pharmaceuticals (ISIS). I am working on a Ph.D. in molecular evolution and work closely with RNAi and other molecular tools. After reading the technology Isis works on I was ecstatic. It looks really and it is something I would love to be apart of. I bought 15 shares for $16.56 and then bought 4 more for $15.55.

Now don't get me wrong. It is not like I think BUD, JNJ, IRBT, or PG are bad companies. They are just not companies that I feel I have enough information on to invest in. BUD controls something like 50% of the beer market. They are going to get a lot of competition from SABMiller and MolsonCoors with their joint venture in USA, MillerCoors. They have been losing market share to microbreweries over the last few years (I should know I drink that beer). But with hops prices skyrocketing these microbreweries are going to be hurting. Maybe one day I will be more familiar with the market and be able to buy, or maybe the Gambrinus Company, the makers of Shiner, will go public one day.

So I made a loss on PG, JNJ, and BUD, but surprisingly I made a profit on IRBT.

I'm not going to be very conservative in my investments. Later I'll tell how I bough into a company that lost over 60% of its value in 3 hours and then went up 40% the next day.

I bought Microsoft (MSFT) for $30.39

Forget today's run up on Microsoft (MSFT) of 9.52% since yesterday. We are in it in the long run. I bought Microsoft for three things.

1. They have the largest moat ever, period!

No matter how much I love Apple, most people and businesses don't use it. Microsoft is still controls the PC market. Sure there are many open source operating systems out there, but they are so confusing to the average market to just install that they hung themselves into obsolescence. XP, Vista, and Office may drive you crazy sometimes but they are good pieces of software. I am on a Mac right now and many people like me are able to run and have installed Windows onto their Macs. This is proof that Microsoft is a necessity.

2. The Xbox 360 kicks ass!

I know all we hear about is the Wii, except for yesterday when Microsoft announced that its Entertainment and Device segment posted its first operational profit. This unit includes the Xbox 360 among other things. Remember ISSS (it is the software stupid). The hardware doesn't matter. Sony thought they could put all this high end electronics in their system and it flopped. Does anyone remember Neogeo or 3Do?

Of course Nintendo came up with a cool little controller, but like I say ISSS! Everyone is going to have motion detecting hardware. The question is who is going to have the fun games to play. I knew Nintendo would not be the system I would be playing for the next 5 years when I played the latest Zelda and found it was the cute childish type as they made it for the Nintendo Cube. Come on Nintendo! The generation that grew up with Zelda is over 20 years old now. Give us free range motion and gratuitous violence. I just can't see anyone playing Grand Theft Auto on the Wii, can you?

3. Microsoft is going to be around for a while.

With no long term debt and $6 billion in cash, Microsoft's balance sheet looks strong. Even if Microsoft makes a mistake they have the money to fix it. They have the money for R&D and for long term strategic plans.

It is just too bad it went up so quickly today. I would buy Microsoft all the way up to $36.94. They have not reached that mark yet so Microsoft is still on my BUY list, but their might be better deals out there.

I bought Google (GOOG) for $656.00

I really like the fundamentals of Google. Their return on equity has averaged 22.9% over the last 5 years, and it has been increasing (if you ignore their first report) for the last 4 years.

If they keep up this return on equity for the next ten years we will see the price for a share of GOOG at $7,413. Can they keep that up? Probably not but even if they get a lower return Google's future is still good. The market still has room to grow.

Google has strong competition from Baidu (BIDU). It helps that when the Chinese try to go to Google.com that they are redirected to Baidu, or so I've heard.

Another reason I don't like Baidu is that I have heard that they give priority to their search returns to advertisers than to the best returns of the search. When Google started out searches were categorized by page rank and this is the reason I started to use Google. I still remember being in my college freshman English class and the professor telling us to use Google.com because it gave the best results for a search.

I also have no clue what is being said on Baidu.com, and I only invest in what I can understand. This is not to say I would never invest in BIDU. I just don't understand the Chinese market for the price of BIDU.

Anyway, this is a long term buy for me. There is much more room to grow for this company. Organization of all the information on the web will always be an important thing and Google controls the stock on its future innovation.

When I am comparing to products to buy I am always swayed by the software. This has become my motto and you will hear it a lot when I discuss tech companies. The acronym is ISSS, It Is the Software Stupid. People don't buy nice looking products for the looks, the software has to be killer. People will search with the best software and to me that software is controlled by Google.

There is not just the search. I use every Google item except for the newsreader, their social networking site, and their Gmail. I love Youtube and see an so much potential in that site.

Carried Interest

Why H.R. 2834 is a bad idea.

H.R. 2834 and other bills like it are a bad idea. H.R. 2834 seeks to tax carried interest at the rate of personal income tax levels instead at current capital gains tax rate of 15% for long term holdings.

This would be have detrimental effect on investment companies, venture capital firms, private equities, and hedge funds, and here is why.

The structure most of these companies have is a limited partnership. A limited partnership has two types of partners, the general partner(s) and limited partner(s).

Limited partners have limited liability for the companies debts. A limited partner can only loose what he or she invested into the company. In exchange for limited liability the limited partner can not be involved with the operations of the company, such as investment decisions as would be the case for the above companies.

At least one person needs to be a general partner to form a limited partnership. This person takes all the personal risk of the company. If the company takes out loan and goes bankrupt then the general partner has to pay back those loans. The general partner may lose his house, car, and have his or her wages garnished by the courts if necessary. The general partner takes on much more risk than the limited partner.

Also, the general partner is also the person who pools the investments from the limited partners and is responsible for investing the money of the limited partners.

It has been the case of investment companies that the general partner also runs the company and makes the investment decisions. This is how it works in small investment companies. Also, the general partner may take a percentage of the profits that the company has made. This is not a managerial fee or income, this is capital gains based on the risk that the general partner takes on as being personal liable for the company.

Lets say there are 4 limited partners and one general partner. They all invest $20,000 for a total pool of money of $100,000. This is not longer their money but is now the company's money. Each person just owns 1/5 of the company. The general partner will get 25% of the profits over 5%. This means that if the company gets a 5% return on the $100,000, then the general partner gets nothing, but if the company gets a 20% return then the general parter will take 25% of the profits except for the first 5%.

$100,000 Initial investment X 20% return = $20,000 profit

$100,000 Initial investment X 5% = $5,000

The general partner will get 25% of the profits of $15,000 ($20,000 - $5,000).

The general partner gets $15,000 X 25% = $3,750

This is return on capital based on the stucture of the business, not income.

This law will wreak havoc on the tax structure of limited partnerships.

ZECCO application success!

I finally got my Zecco account activated. It was a hassle to open with the long list of emails but it finally worked. After I got my trading key I had a little trouble logging in, but I found out this was because of my browser's cookies.

I set up ACH transfer from my bank account. The best thing of all it that it only took a day to setup! I am transferring about $400 right now and it will take a few more days for my money to get to my ZECCO account.

I already have a stock buy in mind. Hopefully my money gets in before the company releases their quarterly report next week because expectations are that it will good and I don't want the stock to go above my limit price.

Oh yea! I also signed up for the Money Market Sweep for my ZECCO account. By default any idle cash is given 1% APY, but if you activate the money market account you can get 4.39% (there are others that are tax free for state and municipal taxes).

Next week if I buy the stock I will update with what stock it is and why.