Buy Microsoft

I recommended to buy Microsoft (MSFT) on my Mar 7 blog as one of the long-term investments with DRIP. It is a great company with incredible valuation. It will report earnings on Thu. Given how greatly Intel has been doing, I think Microsoft will report a great earning as well.  Buying it now will likely give you a jump start if it dose surpass expectations. Even if not, at about $25 it is still very cheap and you can buy more if it drops.

A quick word on sliver. You may notice that it almost reached its historical peak today just short of $50 (intra-day price). It has been doing too well and too fast and in the short term, I think it is a bit parabolic. Don't chase it. Very likely it will pulls back due to profit taking. I hope it dose correct significantly so that we will get a much better entry point again. Be patient!

Buy it when everyone hates it

If you look at the tech stocks  nowadays, probably the most hated company in the wall street is Cisco (CSCO). Since its peak and ensuing crash around 2000, Cisco has been basically doing nothing in the past 10 years in terms of its stock price. Apparently no one wants it; actually even you can say everyone hates it. However, in the stock market, the real money is made when no one notices it. As I said, one of the successful investing features is being LONELY. I think now is the time to put money into this hated and forgotten stock. I like Cisco based on a few factors:

• Cisco is the dominating company in the Internet world. Knowing it or without knowing it, you cannot survive without its products if you have to use the Internet. You can call Cisco the Internet plumber. Without its routers and switches, there is simply no Internet, period. Of course, its business goes way beyond routers and switches and it is well prepared for the new products and services required for the ever evolving Internet.
• While its stock price has been doing nothing in the past 10 years, its business has thrived with increasing earnings, sales, and cash flow. With increasing earnings without stock price appreciation, that is exactly why the stock becomes so cheap. 
• Of course, it is not the reason to buy a stock simply because it is cheap. For a long-term investment, you want to get a business which is great, reliable and financially strong. Cisco is just like that. Its balance sheet is just like a financial fortress with nearly 40 billion of cash. Its net cash after deduction of its debt is well over 20 billion. Given that its business gushing in so much cash, Cisco's financial situation will only becomes much stronger. With so much cash in hand, it has recently announced that it will start to pay dividends at about 1.4% with its current stock price. This is likely increasing year after year, similar to all other great businesses. This is a dream coming true for long-term investors, if you can lock in a super cheap price of a stock and enjoy ever increasing fixed income year after year along with thickening dividend payout. This is how Warren Buffet becomes so rich.

To me, at $17 per share, Cisco is a huge discount and should be one of the stocks in everyone's retirement portfolio. And don't forget to reinvest its dividends via DRIP!

JNJ Earning Report

Apparently I bet on the wrong side regarding JNJ's earnings. It has reported earnings better than expected, a positive surprise to the Street. While I was wrong on it, it has actually substantiated how solid JNJ's business is! As I said, I have been very bullish for JNJ for the long-term and you should buy it around $60 as a core position of your portfolio for your retirement. Even facing terrible one after another recalls in the past year or so, it has still managed to make good money. That's the resilience a sound business can show. No doubt JNJ will continue with the momentum and will come out of the mess even in a better shape.

Warning for US Credit Rating; Don't Take it Lightly

One of the key credit rating agencies, S&P, issued a warning today to the US government. For the first time, Standard & Poor's lowered its long-term outlook for the federal government's fiscal health from "stable" to "negative". This is very consistent with what Bill Gross, the bond king, has warned about the US debt load status. The market seemed to be caught up by a surprise and all of them plummeted heavily today. Is it really something surprising? Not at all. I really don't understand where all the euphoria has come from in the market that everyone seems very upbeat for the US economy. On the contrary, the US is moving toward a very wrong direction and there is almost no return by now with the fast deteriorating debt problem. Sooner or later, the US will collapse due to its extremely heavy burden of the debt load. The US is just following the footsteps of Greece!! So, don't take today's warning lightly and plan your personal finance accordingly. Over the long term, US$ is just like toilet paper. If you rely your wealth on it, good luck with you but you will be crying for sure eventually. Invest in hard assets like precious metals, oil, agriculture etc. Of course, I don't mean you jump in now with all your money. No but you should be prepared to get in whenever there is an opportunity.

Very ironically, over the short-term in the next few months, I think you should be very bullish for the US$. Even among toilet papers there are better ones and worse ones. People have come to the stupid extreme regarding the US$ and have beat it down too much in the past few months. It is now the turn for it to go up. For me, Euro is much worse than US$, which should not even exist with its current format. The amazing upbeat for the Euro lately has created a great opportunity to short the Euro and long the US$. So I'm buying EUO (to short the Euro) and also UUP (to long the US$). I'm confident both will turn out to be good buys now.

Successful Investing (3): Be Vigilant

While I do have quite a few ideas about some good opportunities, I don't want to simply talk about them without first talking about the third feature of successful investing: Be Vigilant. I think Vigilance is especially important in the current irrational market, as the risk is very high to buy any stocks at the moment. However, if you are vigilant enough, you can significantly minimize your risk while enjoying the very bullish momentum. Being vigilant is to use certain risk minimization measures to trade and invest safely. I think the following four are especially important.

1. Stop Loss
For every stock you buy, you should always pre-define your exit strategy for it. Try to remove your emotion out of the process and get out of the position if it hits the exit criterion. This is the most difficult part for every investor but it is THT most important feature for every successful investor. Without a good exist strategy, your big winner may turn out to be a big loser. The best exit strategy I think is a good stop loss. A (hard) stop loss is simply a specific value, which, if hit, will trigger a sale of the stock. It could be an absolute number or a percentage. For example, if you buy a stock at $10/share, you may decide to sell it if it drops to $8 or drops by 15% of your buying price ($8.5). The idea of a stop loss is to allow you to preserve your capital if you are wrong of a stock or get you out of a disaster early enough during a market crash. The trick is to set the price low enough that you won’t get stopped out on a routine pullback, but high enough that you will limit your capital loss. A range of 10-25% within the buying price for a stop loss is commonly used. The most important thing is that you have to stick to the discipline to sell your stocks when the stop loss is hit.  Moving or ignoring stop loss levels almost always results in greater losses in the end. The first exit is the best exit.

If you have a winning stock and you want to protect your gain as much as possible, you should use a trailing stop loss. This is a predefined stop loss percentage point from the highest closed stock price after you buy it. In other words, it is a moving point always tied to the highest closed price of the stock. For example, you buy a stock at $10 and place a 15% trailing stop loss. If the stock price drops immediately, you will sell the stock if it hits the 15% point, i.e. at $8.5 of its closed price. If the stock moves up to $20, your stop loss price will be moved up to 15% lower of the $20, i.e. at $17. This way, you will protect your gain along with the upward movement of your stock.

2. Position Sizing
It is self explanatory that you should have an appropriate position size for each stock you buy. Generally speaking, don't let any single position be more than 5% of your total portafolio. Together with a stop loss, this will ensure that a total loss of any single position will not bankrupte you and you will still have enough capital to continue with your other opportunities. No one is totally immune to failure of some positions. It is a normal part of investing. You have to accept that. The key is to preserve your capital as much as possible if you are wrong.  Otherwise, it is just a gambling and you will soon be kicked out of the investment game completely.

3. Diversification
Diversification dose not simply mean you buy many stocks. The idea behind it is to buy asset classes or sectors that are not correlated. For example, if you buy Microsoft, Intel and Google, you are not diversified at all as all the three are tech stocks. For diversification, you may consider different sectors in the stock market such as tech, pharma, shipping, etc, or domestic vs international, or stocks vs bonds vs commodities, or the mix of them.  The idea is that if one goes up, the other is probably going down. But it has becomes more and more difficult nowdays to achive this, since many asset classes have become highly correlated. Even stocks and bonds have been moving in the same direction much more often than in the past. Nevertheless, for general investors, it is still a good idea to try to be diversified as much as possible, to reduce risks.

4. Appropriate Hedging

A hedge is a position established in an attempt to offset exposure to price changes or fluctuations in some opposite position with the goal of minimizing one's exposure to unwanted risk. Hedging against risk may involve quite complicated techniques but there are some simple ways to do so as well. Although it may not be a hedge technically speaking, I'd also consider it as a hedge to take profits in time. This is especially true when your stock price increases substantially within a short period of time. Quite often, this will be followed by a swift drop. You may consider to sell portion of your stock shares in this case to lock in some profit and let the remaining run further. If it indeed drops, you may consider to buy back some shares if you still like the stock. More typical hedge can use options to realize that, e.g. buying put options to protect your winning stocks. 

Speculative Trade on J&J Earning Call Next Week

Johnson & Johnson (JNJ) is going to report earnings next Tue, Apr 19. As you know, I'm very bullish for JNJ at this level, but for long-term. In a short term, it is still facing significant issues, which may likely negatively impact on its earnings. Goldman Sachs analyst said JNJ will report earnings well below the expectation. I won't challenge this and would agree that this is a very likely outcome we will see next week. If so, its stock price will likely drop in the next few days, especially immediately after the earnings, if indeed lower, are announced. Actually I see this near term problem a trading opportunity to grasp some cash from JNJ stocks, while you may also establish or add your positions for the long-term investment at a better price. Here are 4 ways to benefit it if JNJ really misses the earning call:

(1) You can simply buy new or add more JNJ shares when the stock price drops. This is not a speculation but long-term investment. For such a good company, you should always feel happier to see its price dropping, which will give you more chances to expand your positions for your retirement.
(2) As a speculation, you can buy its put options, e.g. May $60 put options. The put options will increase in value if JNJ further drops from $60.
(3) A better speculative trade is to use so-called put spread: e.g. buy May $60 put options and at the same time sell May $57.5 put options. This will substantially reduce the cost/risk and increase the chance of profit. The only downside of a put spread is that it will cap the maximal gain; in this case, the maximal gain will be capped at $2.5 per share minus trading fees. For just a few days trading and given the size of JNJ, I don't expect the stock price will change too much. I'd be happy to have a gain of $2.5/share for a few days trading. Would you?
(4) Of course, you may also simply short JNJ stock directly, i.e. short sell JNJ at the current price. But you need to remember to buy back to cover your JNJ shares, hopefully at a lower price.

Good luck!

Silver is on fire

On Feb 21, I predicted that silver could reach $50/oz in 12-18 months. Today, it has surpassed $40/oz. I'm probably too conservative in my assessment. Actually nothing has really changed regarding the fundamentals of silver, and if any, they are more in favor of silver. In other words, the financial situation of the world is worsening everyday, which will only further support the appreciation of the precious metals' prices. Of course, I'm not naive enough to think that the gold and silver prices will only increase from this point on. Some sort of significant correction is still very likely. But the overall long-term picture has become much much stronger for an upward trend for gold and silver. My advice is still the same: if you have not bought any gold and silver, you should consider to buy some immediately to get a foot in and add more if a serious correction comes. It is impossible to time the exact best entry point for any trading. If you do, let me know.

The following is one of my silver positions, which I bought less than a year ago. I'd like to show you with this real example how to use options to minimize your risk.

Symbol:               SLV Jan 21'12 $14 Call   

Current price:   $25.70   

Day change:       $500.00 (4.26%)

# of Shares:        5   

Unite Cost:         $5.60   

Total gain/loss: $10,009.93 (355.58%)

When I bought this call option, SLV (the ETF for silver) was traded at about $19 that was almost the silver spot price at that time. I wanted to buy 500 shares of SLV. If I simply bought outright of SLV shares, it would have costed me $9500. Instead, I bought 5 contracts of SLV Jan 2012 $14 call options (equivalent to 500 SLV shares), which costed me $5.6 per share that equals to $2800 in total. This call option means I have the right (but not obligation) to buy 500 SLV shares at $14/share by Jan 21, 2012 if I want. Since I paid $5.6/share, I'd actually buy at $19.6 ($14+$5.6), which is the true cost base for SLV that is almost identical to the SLV share price at that time. Of course, I'd lose money if SLV drops below $19.6 while I'm still holding this call option before Jan 21, 2012. However, the total loss I could have is $2800, instead of $9500 as compared with directly buying SLV shares. In other words, while I controle the same amount of SLV shares, my risk has been substantially reduced by 70%. So how about the profit part? Well, if you do the math, the absolute amount of gain is almost identical between the two, at $10,000 at the moment:

- The SLV current price is $39.51/share. If I bought at $19 for 500, the gain would be $10255

- The option current price is $25.7/share.  I bought at $5.6, so the gain is $10050 for 5 contracts

In other words, since my cost base ($2800) was much lower, relatively speaking, my gain was much bigger at over 300%, as compared to 100% if I bought SLV shares outright. 

I hope you can see the option power now, but you need to know how to play with it appropriately. Inappropriately your risk can be high.

A Daunting Warning

"Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies - inflation, currency devaluation and low to negative real interest rates"

 

I'm frightened to see this prediction. More so when I know who is predicting this. Who is this guy? Bill Gross. If you don't know Bill Gross, you really can not call yourself an investor. He is called Bond King, a self-made billionaire, one of the most successful and respected living investment masters. He is the co-founder of PIMCO, the world largest bond fund with1.2 trillion dollars assets. If you don't know what bond is, it is a formal contract to repay borrowed money with interest at fixed intervals. You can consider it as a loan, for which the lender will get a pay via a fixed interest during the predefined duration/term. The bond market is many times larger than the stock market and actually it is the real driving force determining the ultimate direction of the stock market. Therefore, when the Bond King is talking, I'm listening and very carefully. So did you notice what Gross was saying? Inflation and currency devaluation! And do you know which country he was talking about the default (bankruptcy)? It is USA!

 

Friends, if you are still one of those who simply rely on saving cash for your retirement, hoping you can keep your buying power in 20 years from now, please wake up. I'd like to pound the table to alert you that you are too naive. I won't be surprised to see that the US$ will be worth 50% or less of today's value in 10-15 years from now. Before 1971, the US$ held its value quite well due to the fact that it was backed up by gold (the gold standard). Since 1971 when Nixon demolished the gold standard, the US$ has been devalued by over 95% in terms of gold. I hope you will not be the ones facing the shocking fact at your retirement that your hard-earned money and life-long saving is only worth half or even less when buying goods and services. Start to act immediately to learn to invest. Buy gold and silver if you haven't done so. Buy solid companies' stocks at good prices when opportunities arise. Use dividend re-investment to compound your wealth. These are the simple strategies to fight against inflation and currency devaluation!!!

A good stock in the bad market

Probably everyone would agree that the world is full of risks at the moment: Japan's earthquake and associated nuclear crisis, Libyan civil war and NATO’s air strike, increasing oil prices, worsening EU financial debt crisis...... You name it. But the stock market simply ignores all of them and is roaring straightly up and up, no stops. I like the metaphor to say that the market is firing on steroids. Those who know medicine can understand that patients with severe infections may still feel very good if they are given steroids but this is only a temporary effect. Fundamentally the steroid effect is only making the situation worse and the patient will suffer more due to the worsening condition without feeling it. Honestly I become more scared than half year ago to see this kind of euphoria in the market. The market is clearly irrational to me! But fighting with the market is often very painful. We need to remember: The market can stay irrational longer than you are solvent. For me, I have dozens of long positions I planted 1-2 years ago. Thanks to the bullish traders in the market, they are all performing extremely well with great profits on paper. To hedge against a potential significant market crash, which to me is very likely in the next few years, I have started to add more short side positions that will benefit from the crashing market if it happens. If you have stocks that are doing well, you should consider to do something to protect the paper profits. You may either use a trailing stop to ensure you will at least get the major portion of the profit if the worst comes, or you may consider to buy some put options against your stocks. The premium of put options can be very cheap when the stock is doing well but the put options will significantly increase their prices if the underlying stock price significantly drops. The key is to find the right strike price and the term/duration for it. 

Although I think the market overall is very bad in finding good stocks to buy, it does not mean there are absolutely no good stocks existing. Actually many blue chip companies have very good values in them. I especially like some of them which are experiencing some temporary hiccup, which leads to lost interests of short-sighted investors. The depressing stock prices actually make them more attractive and of much better value stocks. I see one such stock and am working on accumulating it at the moment. It is Johnson & Johnson (JNJ), a leading pharmaceutical and consumer health company. JNJ is probably on the list of every major income mutual fund. Knowing or without knowing it, you likely have used JNJ products one way or the other. Its products cover a wide range of people’s life such as baby formula, Tylenol, band-aid, contact lens as well as medications and medical devices, etc. JNJ’s business is extremely profitable and very stable and it has consistently paid increasing dividends over decades. If you can buy JNJ at a good price, you are almost like simply saving your money in the bank but with better and better interests. You can literally just forget the money without any worry. If you buy the stock and reinvest its dividends via DRIP, 10 or 20 years from now, you’ll suddenly find a huge pile of money accumulated with it for your retirement. While I like JNJ very much, I haven’t expected to be able to buy JNJ at this depressed price anymore for many years. However, in the past year or so, JNJ has been facing some very serious manufacturing problems, which have resulted in many and ongoing recalls of its household products like baby Tylenol etc. Facing with one after another warning calls from the FDA, JNJ is struggling at the moment, which has spooked investors and they have run away from it. As a value investor, I'm happy to see this as I'm having now a great opportunity to invest in a great business at a great price. After all, it is just a very temporary issue and JNJ will overcome it for sure. At a PE ratio of around 10, it is very cheap for such a great business. You probably won't be able to see this kind of investment opportunity anymore with JNJ. This reminds me of a similar opportunity with Genzyme. You can find the details I wrote on Sep 30, 2010. I just cashed out my Genzyme positions for about $5000 a few days ago. I sold it at $5.10 per share and bought it back at $0.02 per share. A $5000 profit in less than a year without even holding the stock is certainly felt great but you can also make good money if you dared to buy the stock when it was very depressed at that time. There are more than one ways to make money. The key is to find an opportunity and put money to work one way or the other. For JNJ, buying, holding and reinvesting its dividends is a great opportunity at the moment for me. If its price further drops, I will buy more to get even better cost bases. This is what I called accumulating shares for deep value stocks.