investing seems like the easiest game in the world

[Spungo]

EDIT
Sep 23, 2013 :
A general word of caution. The stock and bond markets are propped up by quantitative easing. Banks will get hammered hard when the house of cards collapses.



I'm learning more about investing every day as I buy and sell stuff in my imaginary portfolio, and some of the stuff I find is absolutely jaw dropping. It's almost as if people are throwing darts at a wall to decide which stocks to hold. One thing to understand is the meaining of "enterprise value" when looking at a balance sheet. Enterprise value is how much of a loss you would take if you wanted to buy the entire company. Having a negative enterprise value means the company's reserves of cash and cash equivalents are greater than the cost of the company's equity and debts. Example - if you paid $10 for a box that contained $20, you would say the box has an enterprise value of negative $10.
With that in mind, let's see what some companies are worth and how much they are trading for.

General Motors. Enterprise value is 52.46B, meaning it potentially sucks. The actual value of the company per common share works out to something like -$50. The stock is literally worth less than the paper it is printed on, but at least the company is making some money. The company sits on razor thin margins so it could easily start losing money if the economy hits the smallest bump. Despite this being a horrible investment, the stock is up 50% in the last year.

JP Morgan Chase. Enterprise value is -63.77B. This company has such a large surplus of cash that it can buy GM without borrowing money. The stock price is $52.76, but the company's cash holdings work out to $264 per share. The profit margins are incredibly high, so this company can keep making money while the sky is falling. The price to book value ratio for this company is actually less than GM even though the company is better in every conceivable way. JPM is only up 30% in the last year. What's even more crazy is that JPM's current price is higher than the peak before the Great Recession hit. People who bought this stock at the absolute peak of the market would still be up.

Tesla Motors. The company's market cap is close to its enterprise value, which is potentially very bad (it depends on a few things). GM is like that too. The forward PE ratio is 96.7 (extremely bad). The operating margin is -16%, so it's nowhear near breaking even. Return on equity is -63%. The company has 94x more debt than equity. That's like owning a house worth 100k but you owe the bank 9.4 million dollars. Price to book ratio is 32. That's like paying 3.2 million dollars to buy a house worth 100k then owing the bank 9.4 million dollars after moving in. This company has NEVER made a single dollar in profit. In fact, it's actually losing money faster each year. 52 week stock change: up 438%.

There are so many retards willing to throw money in the garbage that all one needs to do is go dumpster diving to find huge piles of cash. Someone could make some serious money by shorting Tesla once the price drops below the 100 or 200 day exponential moving average.

 

[mizzou]

the problem is, people get very conservative when you start betting a LOT of your own money on things.

It's one thing to be a millionaire and start toying with getting huge returns on risky ventures, but if you have a small nest egg, you won't be putting the majority into that bet.

So yeah, if you have a spare $1,000 laying around maybe you can just play the market and get lucky with a 4x increase, but you aren't exactly breaking the bank either.

 

[akahoovy]

Where are you learning about this Spungo? Those are really interesting things to know, very informative.

 

[Lyfer]

free ipad?

 

[jaedaliu]

I think Tesla made a profit last quarter. or it would have if it didn't return a loan to the DoE early. But that doesn't matter because Elon Musk.

But what does that have to do with how "easy" playing the stock market is? It's always been a game that you should play with money you don't mind losing a good chunk of.

Markets change awfully fast these days. Your examples are of stocks at a historic high and looking at the past. Can you tell me which stocks to buy into now and you know you'll make money within a given window of time?

 

[momeNt]

Investors hate him, and you can learn why with this ridiculously simple trick!

I love those side ads!!!

 

[dr150]

Where are you learning about this Spungo...

...From his community college Accounting Finance 101 Professor.

It's part of this week's lesson in September and he's so amused by Prof's Chapter 2 speech that he thinks he can walk into Goldman Sachs and show them how they can do better.

He's banking on making partner in 6 months.....:awe:

 

[akahoovy]

...From his community college accounting finance 101 Professor.

It's part of this week's lesson in September and he's so amused by Prof's Chapter 2 speech that he thinks he can walk into Goldman Sachs and show them how they can do better.

He's banking on making partner in 6 months.....

Ah, I thought we were talking Motley Fool or something similar.

 

[dr150]

Ah, I thought we were talking Motley Fool or something similar.

Never underestimate Spungo.

He's always ahead of the curve and will beat everyone up with his magical mind. :thumbsup:

 

[cheezy321]

The secret it out! That one simple trick is.....
ENTERPRISE VALUE!

Thanks, ive been clicking those ads for years and I never could find that ONE SIMPLE TRICK

 

[Meractik]

Good info, always knew about these fundamentals from simple MBA Finance Classes... but wasn't aware of the "proper" lingo associated with said fundamentals, Enterprise value eh..... interesting. Does not surprise me one bit about your findings.... I would LOOOVE to see more in-depth analysis of U.S. DoD financials..

 

[alkemyst]

the problem is, people get very conservative when you start betting a LOT of your own money on things.

It's one thing to be a millionaire and start toying with getting huge returns on risky ventures, but if you have a small nest egg, you won't be putting the majority into that bet.

So yeah, if you have a spare $1,000 laying around maybe you can just play the market and get lucky with a 4x increase, but you aren't exactly breaking the bank either.

QFT...to make a ton of money the OP's way you have to have a lot and have a lot of time. It's relatively easy to take $100-200k at birth and be looking at a nice retirement and never have it in a risky portfolio.

 

[Spungo]

Where are you learning about this Spungo? Those are really interesting things to know, very informative.

Listening to podcasts mostly. Porter Stansberry's podcast has little nuggets of information that are surprisingly useful. One of the most shocking ones was finding that a PE ratio means a lot less than I thought it did. A company can have a PE ratio of 8 (good) and still be losing money. The numbers in the balance sheet to look at are net profit, retained earnings, outstanding number of shares, and free cash flow. The numbers of shares one is interesting. A company operates in a way similar to the federal reserve because they can issue shares at will. When a company is doing well, it will buy shares back, so the number of shares decreases from year to year. That's good because it means each share is worth more. A company can start issuing new shares to raise money. Just like printing money, it means each share is worth less. A company can use its profits to buy shares back, issue dividends, or do a combination of both.

free ipad?

Make some good investment moves and you can buy several ipads

It's part of this week's lesson in September and he's so amused by Prof's Chapter 2 speech that he thinks he can walk into Goldman Sachs and show them how they can do better.

Stansberry explained this the same way my dad explained it: you'll do a lot better than a managed fund because the guys managing funds make money on transactions. They really don't care if you make money or lose money, and sometimes they're not allowed to do the smart thing because the mutual fund's conditions state that it can't be more than X% cash at any given time. The most profitable move might be to sit on cash while the market peaks then buy after it crashes, but the manager is not allowed to do that. Another problem is that people tend to buy mutual funds near the peak then sell at the bottom, which is exactly the opposite of what you should do. Even if the fund manager is allowed to buy at the bottom, he can't because that's when people pull their money out. People love to buy high and sell low. This complicated mess is why most mutual funds cannot beat the index.

Markets change awfully fast these days. Your examples are of stocks at a historic high and looking at the past. Can you tell me which stocks to buy into now and you know you'll make money within a given window of time?

Think of it more like quantum physics. You can't know for sure which stocks will go up or down, but you can look at probabilities. What is the probability that McDonalds will still exist in 20 years? They've been around for a long time and I know their product very well, so that's a good start. The number of outstanding shares has been decreasing for the past few years. The retained earnings are increasing each year, so it doesn't look like it's going out of business. The company pays about 3% dividends and has been paying steady dividends for more than a decade, so that looks stable. The only question remaining is whether or not the price is right. Over a 5 year span, your chance of making money on McDonalds might be above 90% because the stock never really goes down. It was completely untouched by the housing crash. It gets a lot trickier as the time frame gets shorter, sort of like how saying if tomorrow will be warmer or colder is difficult, but I can say with 100% certainty that December will be colder than September in this part of the country. In a window of 3 months, you might actually lose money on this stock.

Timing of the market doesn't seem to be that difficult because buy and sell points are often clearly defined by specific events. Look at that JP Morgan example. Expand the stock graph to 10 years and look for points that stick out. Would 2004 be a good time to buy? I don't know, so I would say don't buy; it could easily be at the peak of the market at that time. 2005? I don't know, so don't buy. Then you get to 2008 where there is a gigantic crash. Things like the 1929 crash, 1987 crash, 2000 crash, and 2008 crash should grab your attention. With the stock price way down, look at the numbers to see if the company is still profitable. Lots of companies went down even though they were still making money. JP Morgan was one of those companies. Intel was another. Intel's price dropped 50%, but the dividend didn't drop at all, and they never missed a dividend payment. Anyone looking at the balance sheet would say "hey, this company is still making money but the company is on sale! buy it now!" That literally happened btw. After the crash, Warren Buffet said this was one of the greatest buy opportunities. Stansberry said one of his friends went as far as mortgaging his house to buy stocks because it was such a great time to buy.
edit: the sell points are called trailing stops. You can also pick sell points based on exponential moving average. When the current price drops below the moving average, that might be a good time to sell. You might take a loss on that sale, but it's better to lose 10% then buy it at the bottom than to ride a 30% loss to the bottom.

You asked me to make a forward looking prediction, so that's what I'll do. If you have a Gmail account, you can start a new Google Finance portfolio and track my predictions. I'm looking at the stock screener, looking at the NASDAQ, sorting by 52w price change, minimum market cap of 1 billion (too big to fail?). As usual, don't trust anyone on the internet; anyone who buys these and loses money is retarded because they blindly followed some person on a forum. I wouldn't personally buy most of these because I'm not familiar with the companies. It's fun to make predictions when I'm not putting real money on the line. If I were using real money, I would sit on it until a great deal grabs my attention.

Pan American Silver (PAAS):
-dropped 47% in the last year, so it's obviously not at a peak
-company has virtually no debt compared to total assets
-assets have a positive trend over the last 5 years
-positive retained earnings over the last 4 years, although the current year is losing money
-the stock graph goes back to 1996, so it's a fairly well established company that has survived 2 previous market corrections
-the 12,26,9,1w MACD graph appears to be on the up swing
-the current price is far below the 100w moving average
-the stock appears to be oversold

Apple (AAPL): (I didn't expect this one to pop up on the list)
-down 35%
-virtually no debt
-equity, net income, and retained earnings are growing
-the company only paid dividneds during the periods when Steve Jobs was not around, and he's currently dead
-PE ratio is 11.8, so it's not like the stock is disgustingly overpriced
-the MACD valley was back in March at a price of $430, so we missed the boat on that, but it might still be a good price
-the company only had a small decline in 2008, so I guess this company is partially immune to recessions, just like McDonalds and Walmart

Switching over to NYSE. It looks like mining companies are down across the board.

IAMGOLD Corp (IAG):
-down 66%
-well established company
-no debt until recently
-solid net profits, retained earnings, equity
-passed the MACD valley in May

ARMOUR Residential REIT (AAR): (extremely high risk, IMO)
-it was near the break even point for 2009, 2010, 2011, but 2012 had good net income
-positive profit margin for the last 4 quarters
-growing earnings per share

Potash Corp Saskatchewan (POT):
-down 24%
-consistent profits and retained earnings
-growing dividend



One thing I started doing on Google Finance was to make portfolios based on different buying strategies. One was based on MACD graphs with absolutely no other data (basically a form of gambling), one was based on exponential moving average with no other data, one was based on the ratio of ROE to price to book, and one is just filled with Canadian banks because they're some of the strongest banks in the world. So far the one based on actual numbers, ROE to price to book, is crushing the others, but that could easily change over time.

 

[kranky]

I'm not going to try to dissuade you but let me just say Porter Stansberry has a track record. You might want to do a web search for info on some of his past shenanigans. It cost him $1.5 million in penalties with the SEC.

You should put no credence in the claims of people whose business is selling investment tips.

And if JPM has cash holdings of $264 a share with a stock price of $53, why is the book value only around $50 a share? If a company has cash that amounts to 5 times book value, why isn't the book value higher? Book value represents approximately the liquidation value of the company. How much in liabilities would a company have to have to counteract cash holdings of 5 times the book value?

 

[Spungo]

I'm not going to try to dissuade you but let me just say Porter Stansberry has a track record. You might want to do a web search for info on some of his past shenanigans. It cost him $1.5 million in penalties with the SEC.

He did explain that in his podcast. What happened was he had information about a company. He released this information in his newsletter. The SEC went after him for insider trading because giving information in a newsletter is illegal.

His wording from his website:

At issue in my case: a promotional e-mail marketing piece for a Special Report I wrote in 2002. In my report, I claim a former unit of the Department of Energy – a unit that was sold to investors in 1996 and is now known as USEC – was withholding material information from the public.
Because USEC was trading at a very distressed price (half of book value) and was paying such a high dividend (yielding more than 8%), I believed the stock would soar once this long-pending agreement was made public. In my report, I explained why the agreement would turn USEC into a profitable company by lowering the company's raw material costs dramatically. I predicted the stock would double on the news.
And that's almost exactly what happened.

And if JPM has cash holdings of $264 a share with a stock price of $53, why is the book value only around $50 a share?

Nobody knows. How the hell can a company have "earnings per share" when it's losing money? Half of these numbers don't make sense. It's also pretty fucked up when a company pays dividends while losing money. Isn't that how a ponzi scheme works? Collect a bunch of money from investors then use that money to pay dividends? Pretending the company is doing well?

In any event, his podcast is free. Nobody would buy his newsletter if his free material was horrible. Or maybe they would. People buy Tesla even though it's terrible.
Money is nowhere near as magical as people think. It mostly comes down to math, playing the odds, keeping up with the news, and maybe doing some research. I think Frank Curzio's podcast is rather interesting. He works for Porter's company and specializes in small stocks. He'll talk about some company he's interested in and why he thinks it will go up, and his perspective is interesting. Example - he said oil companies are building more deep sea drilling rigs (I'm not sure if that's true), so he said to look for companies that supply parts used to build those oil rigs. A lot of them are small cap companies that make widgets, so there's potentially a lot of money there. That's an interesting way of looking at the market. Suppose GM announces record sales. GM sucks, but who are GM's suppliers? Who makes the radio? Who makes the speakers? Who makes the windshields?

 

[alkemyst]

The banks run the world now. They report on how they want us to think.

 

[DaveSimmons]

Stansberry explained this the same way my dad explained it: you'll do a lot better than a managed fund because the guys managing funds make money on transactions. They really don't care if you make money or lose money

Nope.

a) Funds that lose money consistently stop selling and may eventually be closed down.
b) A portion of the fund manager's pay is based on fund profits. And he'll be fired if he isn't successful.

Also, you're ignoring index funds like S&P 500 funds with under 0.1% expense ratios and no fund managers. That same S&P 500 that most funds and almost all amateur traders do worse than.

Gambling works for some people, for awhile. But if you want to invest the odds of success are much higher if you buy and hold index funds instead.

 

[xanis]

just put it all on Enron

 

[Spungo]

Also, you're ignoring index funds like S&P 500 funds with under 0.1% expense ratios and no fund managers. That same S&P 500 that most funds and almost all amateur traders do worse than.

This gives me an idea. I should put my stock picks and the index in my sig. That way I can track these things on the forum, other people can see it, call me out when one of those companies collapses or ask how I picked that when one splits.

 

[LegendKiller]

He did explain that in his podcast. What happened was he had information about a company. He released this information in his newsletter. The SEC went after him for insider trading because giving information in a newsletter is illegal.

His wording from his website:



Nobody knows. How the hell can a company have "earnings per share" when it's losing money? Half of these numbers don't make sense. It's also pretty fucked up when a company pays dividends while losing money. Isn't that how a ponzi scheme works? Collect a bunch of money from investors then use that money to pay dividends? Pretending the company is doing well?

In any event, his podcast is free. Nobody would buy his newsletter if his free material was horrible. Or maybe they would. People buy Tesla even though it's terrible.
Money is nowhere near as magical as people think. It mostly comes down to math, playing the odds, keeping up with the news, and maybe doing some research. I think Frank Curzio's podcast is rather interesting. He works for Porter's company and specializes in small stocks. He'll talk about some company he's interested in and why he thinks it will go up, and his perspective is interesting. Example - he said oil companies are building more deep sea drilling rigs (I'm not sure if that's true), so he said to look for companies that supply parts used to build those oil rigs. A lot of them are small cap companies that make widgets, so there's potentially a lot of money there. That's an interesting way of looking at the market. Suppose GM announces record sales. GM sucks, but who are GM's suppliers? Who makes the radio? Who makes the speakers? Who makes the windshields?

You have a lot to learn.

Just because JPM has that much cash doesn't mean it has that much cash. A huge portion of those are deposits, which they can't just give away. Furthermore, they rely on those deposits for their entire business. However, even if you exclude those JPM is risky given that something as simple as the Chase credit card portfolio, while huge, has a massive risk base in defaulting customers. There's a lot more to JPM than simple EV, or PE, or anything else. Bank analysis is probably the most tricky of all companies as there are many more variables than just EV, or even PE, or EPS or a variety of ratios.

Do you know who you calculate risk based capital in a Basel III environment? Do you understand the liquidity ladders that need to be in place for Basel III? What is the risk based capital treatment for a corporate loan vs a securitization vs a mortgage (prime conforming and non-conforming). How do you get over just deposit based funding? How will their classification of a SIFI affect their ability to fund different businesses? For example, which corporate lending businesses get squeezed by NIM with the new capital treatment through SIFI?

That's not even getting into the derivative portfolio, or the securities portfolio, and how to calculate VAR.

Why would Apple's P/E not be "ridiculous"? Because people aren't too sure where it is going to go right now. It could fall pretty easily, and massively, from 11, if only because people are still banking on Jobs-ish products continuing.

Why can a company be losing money yet still pay a dividend? There's a difference between the Income Statement and the Cashflow Statement. At times those differences can be huge depending on the structure of your business. If you have a lot of non-monetary depreciation you could be shielding huge amounts of cash from taxes and since the charges are non-cash they could make you unprofitable from an IS perspective but not cashflow negative from a cashflow statement perspective.

McDonalds has a lot of problems. Their franchise fee is really hurting the franchisees, who are saying that McD's policies are starting to make franchises unprofitable, including how McD's foists suppliers on them, regardless of the costs to franchisees. Or how about an up-and-commer like Hardees/Carls Jr, or even Five Guys, or Chipotle continuing to eat into market share?

In your suggestions you recommend two precious metals companies, why? Do you think that metals will go up or down depending on Fed policy, or even global central bank policies? What about the indian central bank curbing gold purchases, how will that affect gold or silver?


As far as GM being such a losing proposition - that's not taking into account anything else they have, nor how they have restructured the company post bankruptcy. But hey, because you discovered EV means that the entire market is wrong and this shitty company is now worth 50% more. Did you even consider how profitable GMFinancial (AmeriCredit) is? Or how much better the forward revenues of GM looks than before?

Before you make conclusions that undercut your new-found knowledge, try not to rely on one aspect of financial measures and, instead, consider the whole picture. Create a well-rounded opinion based upon many sources, measurements and ideas.

 

[AmdEmAll]

Go ahead and short Tesla.. enjoy being homeless

 

[Spungo]

Just because JPM has that much cash doesn't mean it has that much cash. A huge portion of those are deposits, which they can't just give away.

Of course they don't give it away. They lend it. And charge interest. And they screw customers with overdraft fees, overdraft insurance, and tons of other crap. Banks are the biggest scam ever, and that's exactly why you should own one. Just don't put all your eggs in one basket. Nothing is completely 100% safe.

Furthermore, they rely on those deposits for their entire business. However, even if you exclude those JPM is risky given that something as simple as the Chase credit card portfolio, while huge, has a massive risk base in defaulting customers.

Banks are not completely stupid. The default risk is factored into the interest rates, and many of the bonds are sold to third parties. When all of that fails, they bribe politicians to get bailed out by the tax payer. Both major political parties are very heavily bribed by banks. If you look at the list of banks that died, you'll notice that most of them are banks nobody has ever heard of. The big ones bribed their way out of it. Wells Fargo is still up, Citi is still up, JP Morgan is still up, Bank of America is still up.
They might take some losses, but they won't go bankrupt. Worst case scenario, the stock goes down for a year then it recovers.

Why would Apple's P/E not be "ridiculous"? Because people aren't too sure where it is going to go right now. It could fall pretty easily, and massively, from 11, if only because people are still banking on Jobs-ish products continuing.

Companies that are based entirely on hype often have ridiculous PE ratios. Facebook's PE ratio is 173. Linkedin is at 711. A high PE ratio could mean the company is just having a bad year (or something else), but it can also mean there's some serious hype going on. A quick google search says Nortel's PE ratio was 125 at its peak, and it was all hype. That should have been a huge red flag.

Why can a company be losing money yet still pay a dividend? There's a difference between the Income Statement and the Cashflow Statement.

There are probably some cases where doing so makes sense, but I'm looking at the companies that really look like scams. Sort a stock screener by dividend yield and look at the ones near the top. Even after excluding depreciation, lots of them will pay dividends while the net income is negative. Some companies are paying dividends with borrowed money. That feels like such a scam thing to do.

McDonalds has a lot of problems. Their franchise fee is really hurting the franchisees, who are saying that McD's policies are starting to make franchises unprofitable, including how McD's foists suppliers on them, regardless of the costs to franchisees. Or how about an up-and-commer like Hardees/Carls Jr, or even Five Guys, or Chipotle continuing to eat into market share?

They'll figure it out. The company has been around since the 1950s. Something really major would need to happen before they start losing money, and you would see it coming from a mile away. The stock won't be fine one day then crash the next. It'll be a slow decline over many years, if it happens. Worst case scenario, IMO, would be declining earnings. The stock would still be going up and paying dividends, but you would sell it because it's not as good as other investment options.

In your suggestions you recommend two precious metals companies, why? Do you think that metals will go up or down depending on Fed policy, or even global central bank policies? What about the indian central bank curbing gold purchases, how will that affect gold or silver?

I personally wouldn't buy either of them because I think precious metals are silly, but I am predicting these companies will increase in value in the long run. The rubber band has been stretched, and I think it will snap back. I think it's called regression to the mean. There's no reason to believe that these companies will suddenly go bust after many years of solid operation. They've have one bad year. I have no predictions for gold and silver going up or down, but I will make the prediction that neither of them will completely crash out. As long as the fed continues quantitative easing, there will be a demand for gold and silver. People have historically bought precious metals during periods of uncertainty or high inflation. USA's inflation is fairly high right now due to QE, so Americans have a reason to hold gold. Ron Paul and Alex Jones are still popular, so that's some gold demand. Japan has set an inflation target, so the Japanese have a reason to own gold or something other than cash.

As far as GM being such a losing proposition - that's not taking into account anything else they have, nor how they have restructured the company post bankruptcy.

GM has been doing very well in China, and they even set a sales record in August, but the company is still hanging on by a thread. The profit margins are extremely tight. All it takes is a small hiccup in the economy before they're losing money again. It also doesn't look good when the insiders are selling the stock at a rate of 785 shares sold for every share purchased. link

But hey, because you discovered EV means that the entire market is wrong and this shitty company is now worth 50% more. Did you even consider how profitable GMFinancial (AmeriCredit) is? Or how much better the forward revenues of GM looks than before?

I just don't like the look of this company. They've been losing market share for decades, their reputation is tarnished, total equity has slightly declined for the last 4 quarters while total liabilities have steadily increased for the last 4 quarters, their debt to assets ratio has been increasing for the last 5 quarters, and the net change in free cash has been steadily declining for the last 4 quarters. GM might recover, but I would still say this is a high risk company to own.

 

[Miramonti]

Conceptually, investing isn't very complicated or difficult.

Practically, making investing decisions with your money while some positions are going your way and some are going against you, or all in one direction, is a completely different scenario and requires an additional set of objectives and implementations, most of which few people have sensibility and discipline with.

 

[jagec]

One thing I started doing on Google Finance was to make portfolios based on different buying strategies....one is just filled with Canadian banks because they're some of the strongest banks in the world.

Wow, seriously? And you don't think that their real estate bubble bursting is going to do some damage?

So, if you were investing back in the 1990s, you would hold on to Eastman Kodak (blue-chip company, decades of innovation, plenty of cash) and shun Amazon (lots of debt, losing money every quarter, new sector of the market which may not pan out)?

 

[OverVolt]

I knew about the first and last. Did not know JPM was in such good shape. I really don't trust the banks balance sheet at all.