Programmer's Investing Notebook         :: Investing notes from a software developer :: | About Me |

It's not easy to be in the stock market in the past few days and weeks. I had a feeling that the stock market recovered a bit too high too soon. I should have capitalized on that. How? By betting that it will correct itself. How do you do that? By "shorting," which is a way to make money when a stock goes down: you're basically betting that a stock will go down, and when it does, you make money. I just discovered that there are now ETFs designed specifically for that purpose. That's a very good investor's resource, in my opinion.

Here are a few ETFs that do the "shorting" for you:
ProShares Ultrashort (QQQ) - rewards a fall in the Nasdaq;
Proshares Ultrashort S&P 500 (SDS)- rewards a fall in the S&P benchmark
Proshares Ultrashort Dow 30 (DXD) - rewards the fall in the bluechip industrials.

Rydex recently rolled out eight new ETFs, half of which offer double-inverse plays on the energy, financial, health care and technology sectors. The Rydex Inverse 2x Select Sector Financial (RFN) - up more than 8 percent in light Thursday trading.

Keep in mind that "shorting" can cause unlimited losses: if stocks go up, you lose. But these ETFs do limit the risk somewhat and that is a very good think.

Reference
Shorting Stocks Could Be Way to Play This Market, cnbc.com article

There was an interesting observation in the S&P Outlook recently. Since 1945, in the period from November-April, the S&P 500 returned 7.19%; in the May-October period, just 1.6%. What do do? Sell in May, and Buy back in October!

I think this is true this year. I feel like we’re due for a correction. It might be a good time now, especially after the recent records.

They recommend doing the following.

For May-October overweigh
- consumer staples
- health care

For November – April overweigh
- financials
- industrials
- materials
- consumer discretionary
- information technology

Now that’s an interesting observation…

Here's a chart that breaks the returns by month, averaged since 1950.

ETFs are great. They allow you to buy the whole index of stocks with one purchase. I have always like them. But these days, there are new ETFs coming daily. Where should you invest? John Bogle, featured in Barron's has some good advice, I think.

Q: Let's say an individual has a million dollars to spend in constructing a stock and bond portfolio with ETFs. What kind of ETFs would you recommend their using?
A: First off, we expect that investors should talk with their financial advisers about their particular needs. The basic strategy that we see people using is buying the broad benchmark, so perhaps the Russell 3000 Index Fund (ticker: IWV) and the MSCI EAFE Index Fund (EFA), which gives you exposure to all the developed non-U.S. markets such as Western Europe and Japan. And depending on an individual risk tolerance and preferences and liquidity needs, we have bond funds. If you want to maintain greater liquidity, we see a lot of people who do that in our short-term Treasury fund [Lehman Short Treasury Bond Fund] (SHV). But for longer-term investments we see people investing more frequently in things like the iBoxx Investment Grade Corporate Bond Fund (LQD).

Reference
What's the Skinny on Skinny ETFs? - Barron's Online

Excellent and thorough article on a basic, fundamental truth. It's something that I deeply believe in: investing is for the long term. If you think you can time the market, you might get burned out, especially now. But if you can invest for the long term, for at least five years, you'll do well. Simple as that.

Reference
Reacting to Market Declines: The Case for Staying Invested, Fidelity Investor's Weekly Newsletter (very good newsletter, btw)

Do you know what's going on in the housing market? Do you want to know the latest interest rates on a 30-year mortgage? Are you interested in the housing market in general? Is so, Real Estate Weekly newsletter is for you.

This newsletter is filled with useful, relevant information. It comes in to my e-mail box every Friday. I always look forward to reading -- mostly scanning -- it for couple minutes, but occasionally reading an article or two that it refers to. This is good stuff. I recommend it.

You can read the latest newsletter, March 10, 2006 edition here.

Reference
Real Estate Weekly, MarketWatch eNewsletter
- To receive the newsletter, you need to create a free MarketWatch account, sign in, and sign up for the newsletter from your account details (I was not able to find a link to sign up directly.)

Sure, it is always nice to buy something and have it surge immediately afterwards. Delightfully, this does happen. But aside from being lucky, investment is all about finding value that emerges over time. Markets tend to be overly short-term oriented; so long-term investors can always find something worth buying whenever the market responds to temporary events. --Dr. Charles Lieberman in Barron's Investor's Soapbox

Can't agree with it more. If you're a short-term investor or you just want to make a guick buck, you might get lucky and come ahead the smartest guy in the world. However, true investors put their money to work for long periods of time (at least 5 years). They invest in something they like and they get good returns. They always win, as opposed to short-term investors -- speculators -- who win only some of the time.

I just signed up for the I Will Teach You To Be Rich blog yesterday and I'm already finding great stuff: Warren Buffet's letters. When the greatest investor of all speaks, open your ears. He sees things ahead of everybody else. Read them every year, that' s my tip.

I recently gave a speech titled "Investing 101." It was for my local Toastmasters club. In the speech, I covered some things that might be of interest to individual investors. I'd like to share some of them, below.

Stock Market 101

What is a stock market? It's where all public companies are listed and are available to be traded. Public? After a company has been successful and the owners decide to make some big money, they sell the company to the public -- investors like you. Once the company is public, the original owners no longer own the company. How do you buy shares of the company? You can do it in a brokerage account, or you can buy the shares directly from the company (some companies allow it).

How does a company go up and down? A company goes up when there are more buyers than sellers. That's the basic idea. For example, Coca Cola makes the news that they're going to introduce a Super Cola. People that don't have any shares in the company want to buy some. However, the people that hold the shares hear the news as well. They don't want to sell the shares. They'd sell it at a premium. So the new people buy it at a premium and the price of the stock goes up.

Are there any risks in investing? Certainly. There are two types of risks: company risk, and market risk. If a company delivers some bad news, it will go down. Sometimes, sharply. The other risk is when the whole economy is not doing well. In that case, most companies go down. Nonetheless, the stock market has been the single best place to put your money over time.

How I Started It

It all started as a Yahoo game (I believe you still can do it) in college. Yahoo gives you 100K and you invest it anyway you want it. Some of my friends were doing it, so why not try it? So I tried it, and I was doing good. At that time, late 90's, everything was going up. I remember that once I put money into Oracle, and within months, it quadrupled.

So I decided to open a brokerage account. It was all good for a couple of months. However, at that time, the bubble started to burst. I lost a lot of money. As I looked back, I said to myself that I didn't know enough about the whole investing process and about which companies to invest in. So I subscribed to several magazines. I started reading. I gaines some confidence. My stocks started to go up again and I recovered most of the money I lost.

I'm still an investor now. I invest regularly. But for the first time, I feel that I'm in control.

My Tips & Strategies

Do I have any secrets? No, no secrets, just tips. First of all, invest as soon as you can. You don't have to have a lot. Start small: couple hundred is enough.

Invest regularly and put money into the same companies over and over. That way, when the company goes down, you'll buy more of it for the same money, and you'll even out when it eventually recovers.

Invest for the long term. If you're not going to invest for at least 5 years, don't do it. Just don't do it. It's not worth it.

Invest in ETFs and Mutual Funds. ETF, Exchange Traded Fund, is basically a group of stocks traded as one. One good one is the S&P 500 -- SPY is the symbol (I have several others). ETFs minimize risks. Mutual Funds? When you invest in Mutual Funds, you're basically paying somebody to trade for you. One great company -- low fees, good choices -- is Vanguard.

Brokerage accounts. I use two brokers: FirstTrade.com and Interactive Brokers. I buy Mutual Funds at First Trade (free) and I pay a $1 per trade at Interactive. However, an excellent choice for starters (I'm looking into this too -- it would be my 3rd broker), is BuyAndHold.com. BuyAndHold lets you invest as little as $20 per month into a company and re-invest regularly. It's called dollar-cost averaging and I recommend doing that.

Diversify. Don't just buy one company and hold on to it. It's too risky. Spread your risk. Diversify. It's the key word in investing. Buy several companies, buy ETFs, buy Mutual Funds. Minimize the risk. That's the way I do it.

If you invest regularly and for the long term, you should do well.

An article from Bankrate.com. Here are the seven steps outlined:

1. Develop a written financial plan
2. Save, save, save
3. Live below your means
4. Lay off the credit
5. Make your money work for you
6. Start your own business
7. Get professional advice

Seems easy enough, but a lot of us don't follow these rules. Read the article for more details (each step is eplained in more detail).

According to Bankrate.com gas prices will hit $3 a gallon this coming summer! Wow! You've got to be kidding me! Because I have a long commute to work, around an hour each way, I spend easily over $100 per month on gas. (Make that $200 if the price increases -- no way!) And I drive a fuel-efficient car -- 95' Honda Accord. Hopefully it doesn't come to that. But if it does, I'll be even more sorry for those SUV drivers: they'll basically get killed.

What's my advice? Get a fuel-efficient car. Did you know that diesel cars have a 20-30% better fuel economy? (I didn't.) Also, now they have those hybrid cars which have a great fuel economy. Keep those green cars coming, Detroit!

See the reports on Bankrate.com here.

Are you looking to buy a house? Why pay a 6% commission to a real-estate agent when you can buy directly from the seller? This way of buying is getting more and more popular. I'm listing several best sites that list the houses for sale by owner.

ForSaleByOwner.com
GoneHome.com
Owners.com
PrivateForSale.com

However, if you want to buy direct, you'll have to do some of the work yourself -- not that difficult. But hey, with the ridiculous prices of the houses now, you'll save $10-15K, not bad.

Too Expensive. Are houses too expensive? I think so, that's why if I'm not going to come across a great deal, I'll wait for the houses to go down a little. Housing market is similar to the stock market: after the run-up, it's due for correction. C'mon, houses are to the point where people no longer can afford them! I think we'll see some correction within next couple of years. But, after that, they'll climb again, as they always do.

If you were wondering what it would be like to own rather than to pay your apartment rent, I've got a tool that will do the calculations for you: "Rent Versus Own Calculator." It will only take a little information from you (the obvious: rent, price of the house, mortgage rate, and down payment), and it will spill out the results -- like monthly payments, tax savings, overall savings, and more -- for you. Pretty neat and it might open your eyes a little bit.

See it for yourself. I'm a little reluctant to buy a house (mainly because of the high prices), but I think if I find a good deal, I must just go ahead and do that. It seems you actually can save a lot by doing that.

This calculator comes from eLoan.com -- they have more useful info about loans & stuff.

Note: Even if it is 2004, you can still open an IRA account and contribute for year 2003. You can do it until April 15.

Which one is better?

The maximum amount that you can contribute is the same for both — $3,000 for 2003 (plus $500 if you are 50 or over) or your taxable compensation per year, whichever is less. So the contribution limit is not a factor.

And both contributions come from post-tax dollars. So you have already paid taxes on this money.

But when you draw money from a traditional IRA, you are taxed on the earnings on the nondeductible contributions (though you are not taxed on the withdrawal of the contributions, because you already paid taxes on those). Roth earnings, if you meet certain conditions for distributions, such as being over 59-1/2, and having the account for at least five years — are not taxed.

This can make a very big difference over the years. If you are going to be leaving the money in the account to earn interest or dividends for a long time, the Roth IRA may be more attractive.

Also, if you expect to be in a higher tax bracket when you plan to draw money out of your IRA than when you originally contribute, the Roth IRA will probably work better for you.

How much money do you need to invest to become a millionaire? That's a good question. I tried to answer that using a Financial Calculator found on Investopedia.com. I entered that I want to be a millionaire when I'm 50 years old, and that I think my money will grow at 10% (I think that's actually mediocre growth -- but hey, that's not bad), so what did I get: I'll be a millionaire if I invest $672 monthly. We'll see. Actually, with my $500/month stock-investment, mutual-fund investment, and 401(k), I'm putting more than that so I'll should be a millionaire soon -- yeah, right. That's not my goal; my goal is long-term, consistent investing.

Try out the calculator at Investopedia.com for yourself here.

Interpretation that I received:

If you are 25 years old with $10,000.00 invested at a rate of 10%, you will need to continue investing $672.02 per month to be a millionaire at 50 years of age.

The more you invest monthly and the more you already have invested, the less time you need to become a millionaire. Logically then, the amount you need to save monthly would increase if your time horizon, your already-invested money, or your investment rate were to decrease.