Financial

Investment scorecard

This is a blog entry I’ve wanted to write for awhile, one of those back pocket subjects you may or may not be interested in reading.  I love investing.  I love buying and selling equities and mutual funds.  I’ve had mixed success over the years.  Before the dot.com craze, I knew very little about investing, and I didn’t have any money.  Then when the dot.com happened, the market piqued my interest, and I was lured by the siren’s sound of skyrocketing returns.  At the height of my early investing career, I sold my shares of IBM and Hewlett-Packard and plowed them into several technology stocks that I sorely regret buying.  Here’s a list of what I bought, in case you want a laugh–Webvan, which no longer exists and when down in a blaze of glory as one of the worst dot.com investments of all time, Infospace (INSP), which burned me twice, Palm (yes, that lovely PDA company that peaked and burned), and a couple of other forgettable technology stocks that also tanked.  I lost money during the dot.com bust just like everyone else, but since then I’ve wisened up.  My MBA taught me the basic principles of finance and investing such as the value of PE ratios and Betas, stuff that can be pretty boring but are critical to sound investing.  It also gave me the killer instinct when it comes to investing, and since 2002 my three-year return has been around 11%.  With the disclaimer that I’m far from a perfect investor and still make mistakes, I want to share some of the investments I’ve made in the last year.  If you’re interested in investing, I’ll also give you some suggestions on investments I haven’t made but have had my eye on.
  1. Google (GOOG):  Bought at $85/share, sold at $200.  Current price, $296.23/share.  I bought into Google at IPO last August and did very, very well in just a few months.  I sold early because I assumed Google would not go much higher than $235 per share.  I was wrong, but I was pleasantly surprised to see my faith in Google vindicated.  I do not recommend buying Google at nearly $300 a share.  If you bought if for much lower than that, keep it.  It is a good long-term investment.  Recommendation:  Hold.
  2. DreamWorks Animation (DWA):  Bought at $36/share, sold at $39/share.  Current price, 26.81/share.  This is the one that went sour.  DWA overpromised to investors, and there are now at least six class action lawsuits against DWA claiming CEO Jeffrey Katzenberg made false promises on the sales of "Shrek 2" DVDs.  Its main rival, Pixar, also tanked when sales of "The Incredibles" DVD underperformed.  I sold DWA before its 2nd quarter earnings were released, and I’m glad I did.  The overall valuation of CGI animation studios appears to be too high, and CGI animation appears to be peaking in popularity.  I don’t like the movies in the pipeline for DWA in the near future ("Walter & Gromit," "Over the Hedge").  DWA’s stock price probably won’t bounce back until next year, when "Shrek 3" hits theaters.  Recommendation:  Don’t buy it.
  3. Blue Nile (NILE):  Bought at $25/share, sold at $29/share, currently at $33.20/share.  I love this stock.  I met the CEO and love the concept of an online jewelry e-tailer.  Valuation is now high, but take a closer look at this one.  I sold at a profit and wish I had kept it for the long term.  Recommendation:  Weak buy.
  4. Infospace (INSP):  Bought at $48/share, currently at $33.98/share.  Twice bitten, should have been shy.  I listened to Fool.com and still believe in the long-term value of this company as a provider of online content.  INSP is especially strong in mobile services but heavily reliant on a couple of wireless providers.  I think it is a decent buy and have been disappointed that it isn’t doing well.  Take a closer look at INSP.  Recommendation:  Buy.
  5. Overstock.com (OSTK):  Bought at $69/share, currently at $39.36/share.  This is the worst investment I’ve made since the dot.com bust.  Again, I mistakenly listened to Fool.com (advice is cheap–go with your gut instinct).   Fortunately, like INSP, this time I only bought a few shares.  OSTK is a direct competitor to eBay, a David versus Goliath.  OSTK has a lot going for it, and eBay, other than Pay Pal, has had its share of difficulties lately.  OSTK’s primary problem is that it is sticking to a tried and untrue dot.com formula–focus on growth over profits.  It’s trying to get big fast, and Wall Street is punishing it for following this strategy.  The stock spiked at the end of 2004 when projections showed OSTK would turn a profit in early 2005.  It didn’t.  I think it will by early 2006.  I think it’s a long-term buy, but not till it’s profitable.  Recommendation:  Hold.
  6. Morningstar (MORN):  Bought at $18.50/share, now $28.79/share.  I turned my second most successful IPO after Google with this gem.  The king of investment research, Morningstar is a promising microcap with a marquee name in the financial world.  The CEO owns over 70% of outstanding shares.  If it can get past the SEC subpeona and potential conflict of interest, it is golden.  Valuation is rich now because Morningstar’s profitability has been spotty.  Recommendation:  Outperform.
  7. Cogent Technologies (COGT):  Bought at $22.50/share, now at $29.76.  Rated #1 microcap for 2005 by BusinessWeek magazine, this firm builds biometric systems used as security devices.  It IPO’d in 2004 at $15.50/share, peaked at $38/share, dropped to $19/share over share dilution concerns and concerns over sustainability outside government contracts.  The price spiked with the bombing in London.  This is a great long-term buy.  Recommendation:  Strong buy.

As you can tell, the common thread in the stocks listed above is that they’re heavily technology-based.  As Warren Buffett says, buy what you know, and I know techology better than any other sector.  However, here are some other investing candidates I chose not to invest in for the time being but still have my eye on.  They cover a range of sectors. 

  1. Archipelago Holding (AX):  The holding company of the electronic exchange is merging with the New York Stock Exchange, effectively making the NYSE a publically traded firm.  Valuation is high.  Recommendation:  Hold.
  2. Dell Computer (DELL):  Mature stock, but Dell is a must for any technology portfolio.  I almost bought DELL in late 2004, but the price spiked following excellent Q3 returns.  Dell will continue to dominate computing hardware.  Recommendation:  Buy.
  3. eBay (EBAY):  Everyone knows eBay.  eBay took a big hit earlier this year because its market is maturing.  It’s Pay Pal division is growing gangbusters and could become an alternative to credit cards.  If you own OSTK, don’t buy EBAY, and vice versa.  Of the two, eBay is a better buy now.  Recommendation:  Buy.
  4. Krispy Kreme Donuts (KKD):  This one-time darling stock with the world’s best-tasting donuts has fallen on hard times.  Wait and see what will happen, or make a bet while the price is low.  Recommendation:  Hold.
  5. Petrochina (PTR):  The U.S. ADR for one of China’s largest oil companies.  Warren Buffett owns a small stake, and it operates like a U.S. company.  Petroleum demand will remain strong, especially in China market, but Petrochina’s price has increased 85% since last August.  Wait and see what happens with CNOOC’s offer to buy Unocal.  If it fails, buy Petrochina.  Recommendation:  Hold.
  6. Salesforce.com (CRM):  Customer management Web services firm that competes with Siebel Systems.  High PE ratio, very rich valuation, but good long term potential.  Recommendation:  Don’t buy it. 
  7. Sears Holdings (SHLD):  Buyout artist Eddie Lampert merged Sears and Kmart into a single company.  Lampert hopes to turn SHLD into the next Berkshire Hathaway, Warren Buffett’s investment vehicle.  Combining two aging retailers, Sears and Kmart, into a single company is a crazy idea, but Lampert is crazy like a fox.  The cash they generate will allow him to make other Buffett-style purchases.  What about General Motors?  I should have boughten this at $96/share when I had the chance.  Recommendation:  Buy.

One last recommendation–check out Exchange Traded Funds (ETFs).  They are a great way to diversify and a good alternative to mutual funds, particularly index funds.

Making sense of 529 plans

If you have young children like I do, you might be wondering what you should do about your children’s college education.  My son is still years away from going to college, but because the cost of a college education has skyrocketed in the past decade, we already need to start thinking about saving for his college education.  We checked out a variety of investment plans for our son and any other future children we will have.  The choices are complicated.  There are many different investment vehicles to consider, and there are many plan to choose from when setting up a college fund for your child.  You can open a traditional IRA or Roth IRA for them, you could set up a Coverdell education savings account (ESA), or you could open a 529 savings account.  Most people choose to open a 529 account because it has some excellent tax benefits.  We chose a 529 plan because it offers the greatest flexibility of any option.  For one, the capital gains on after-tax money invested is tax-free if the money is spent on the beneficiary’s (i.e. your child’s) education.  Secondly, you can invest up to $230,000 in a 529 account for each beneficiary.  Unfortunately, there are also a couple of drawbacks to consider when thinking about opening a 529.  First, the money you have saved in a 529 account will count against you when your child applies for need-based financial aid.  FAFSA will count your 529 portfolio towards your net worth when it calculates how much financial assistance your child needs.  Second, there is currently a sunset clause on 529s, and they are scheduled to expire in 2010.  Fortunately, the current session of Congress is debating whether to eliminate the sunset provision and will likely eliminate it in the near future. 

Choosing a college savings plan for your child is also complicated by the fact that there are many 529 plans available nationwide.  Each state has one or more 529 plans to choose from.  Unfortunately, not all plans are created equal.  It’s not enough to simply choose the 529 plan offered by your home state.  We used SavingforCollege.com to research the various 529 plans.  We were disappointed to find that our home state of Washington offers a mediocre 529 plan (high fees and low returns).  Alaska and New York currently offer the best plans as measured by minimum investment requirement, investment manager, portfolio options, management fees, account maintenance fees, residency requirements, and tuition benefits.  We chose the New York State 529 plan for our child because it offers maintenance fee free accounts with minimal required investment.  Its fees are a bit higher than Alaska’s, but it offers far more investment choices.  We also do not have to be New York state residents, and our son is not obliged to go to college in New York State when he heads to college.  Vanguard, a reputable investment firm, manages New York’s 529 plan.  If you are thinking about starting a college fund for your child, consider opening a 529 account with a state such as New York that provides maximum flexibility.

Morningstar is born

Morningstar’s initial public offering concluded successfully last Tuesday.  I was allocated 100 shares at $18.50 per share, 50 fewer than I submitted in my Dutch auction  bid.  MORN is now up to $20.40 per share.  While not spectacular, the IPO is considered successful because the stock price never slid below its initial asking price.  Usually stocks that go IPO slide after the first couple days of trading.  Morningstar never broke it initial price threshold.  My next challenge is to figure out when to sell MORN.  Do I sell quickly, or do I hold it?  I thought about setting a target price to sell at $25/share, a one-third price gain.  IPOs are typically volatile at the outset, so it is possible it might make such a gain in the short term during a bull market.  Because I purchased shares with cash, I will pay capital gains when I sell.  If I wait one year to sell the shares, the capital gains rate will decline.  If I believe that MORN is a good investment for the long term, I would prefer to keep them over the long term.  My own feeling is that Morningstar will flourish as an independent investment research firm, but in the long term it might be a takeover target by a large financial services firm such as Merrill Lynch or Charles Schwab.  That would be a boon to the stock price.  I’m not sure yet what I will do, but I am glad that–at least for the time being–I was again successful in securing IPO shares of a promising company through Dutch auction. 

Tonight I visited a friend’s house to demo some karaoke songs for the upcoming community talent show.  The talent show was a hit last year.  We plan to sing a duet together.  We narrowed our options down to either "Endless Love" by Lionel Richie and Diana Ross, or "When I Fall in Love," the theme song from the movie "Sleepless in Seattle" popularized by Celine Dion.  I’m partial to the second song, perhaps because I’m from Seattle.  I think that song better showcases our voices.  I can pull off a good rendition of Lionel Richie, but I sing more like Clive Griffen, the one who performed the duet with Celine.  (I also plan to sing my signature song, "Oh Pretty Woman" by Roy Orbison, solo at the talent show.)  After we settle on a song, we need to work out the logistics at the talent show so that we can sing on stage.  We need two microphones and accompanying music on CD or tape.  I thought that we could use her karaoke machine, but it’s not portable and needs to be hooked up to a television.  We’ll figure it out.