Blood is in the Streets: Value Investing

      I got home today from my real job and my newsfeed exploded. Stock markets are down, as the news will tell you, in their worst plunge in 5 years. The Dow Jones has plunge 1000 points in a week.  The NASDAQ is down 3.5%. "Investors" (aka day-to-day speculators) are worried about the devaluation of the yuan, the EU remains bleeding red, oil has plunged below $40 a barrel. There is blood in the street.
      Do you know what I'm doing? I've sat back after a long first day in the school year, and am having a cool drink. I own the stock of a major oil company making about 5% dividends a year. I want to purchase more stock in that company, since oil will eventually rebound. That's a guaranteed 5% return every year, made even more secure by the oil industry's reputation for never lowering a dividend. Even if this corporation should lower their dividend this year, I will still be making a 3-4% return. Plus appreciation, since I am in fact buying in a slump.
      I own the stock of a major pharmaceutical company responsible for many prescription strength drugs. Currently, they are also yielding a 5% dividend yield. Even if asthmatics and STD bearers completely died out, there will still be enough sick people to keep the pharmaceutical industry afloat. This company is heavily weighted towards Europe, hence the price decrease. I want more of this stock and to cash in on the almost inevitable appreciation.
      I own the stock of a major European telecommunications firm currently buying up international market share. The dividend yield is massive, mostly due to capital expenditures, but even the more typical dividend yield seems attractive. If current dividend yield continues, I'll be receiving a 6% return.
      I own a few other stocks and mutual funds and Motifs and similar investment vehicles. Some are doing well. Some are not. I am unconcerned.
      Long-term stock strategies do not worry about such market movements. 500 points on the Dow Jones in one day does not affect the long-term viability of a good company. Any company destroyed by such movement is, by definition, not a good company. Buy and hold is criticized because it leaves investors exposed to these types of movements, but that is precisely the point of a market correction. The market economy is continually growing. The stock market will, in the long haul, grow.
      If I had more liquidity, I'd be buying like crazy right now. I'm a public school teacher, however, so I'm simply buying in as my paycheck comes in. Hopefully, things will stay this cheap in a few weeks...

Session 5: Video Game Investing: Wealthfront

    This review is actually a cheat. Wealthfront does not try to create a video game mentality in traders. It is, however, aimed entirely at Millennials. As with Motif, there has been a lot of hype. The usual "tech disruption" theme has been playing. Supposedly, Wealthfront is the agile new competitor putting companies like Charles Schwab and T. Rowe Price out of business. I remain firmly in the skeptical camp.
     Wealthfront looks glitzy. And the investment strategy it proposed for me was sound. It recommended, based on a questionnaire, that I allocate 20% of my portfolio to an aggressive domestic index fund, 11% to an aggressive international index fund, 10% to a slightly less aggressive domestic index fund, and a smattering of bonds, targeted funds and municipals for the remainder. That's practically textbook for my age group.
     In fact, it's a formula devised by the traditional brokerages such as Charles Schwab and T. Rowe Price. It safely bets the risks of aggressive stocks against the stability of conservative stocks and bonds. It is the closest thing to a guaranteed return in stock market investing, especially when adhered to with fidelity.
     I fail to see how something with a long track record is "disruptive." The wheel was disruptive 5,000 years ago, but by now a person selling a "disruptive" wheel is probably a con man. The gun was disruptive 500 years ago (ask the Aztecs), but today "disruptive" weapons are things like rail guns. Portfolio theory is one of the few stable factors in the entire investing world. How is a new algorithm that plans my portfolio precisely the way every reasonably competent advisor would advise anything close to disruptive? True, software charges less than a human advisor, but index funds were already practically free anyway (no, 0.1% fees do not really count).
     So go ahead and invest in Wealthfront. Or Charles Schwab. Or T. Rowe Price. Or E-trade. Or Scottrade. Or USAA. Or...actually, bag it. Scrape together $200,000, buy yourself a seat on the NYSE, and start your own "disruptive" portfolio advisory service. Just don't invest in anything fancy and glitzy thinking it will give you a superior return because it is more visual stimulating and has some fancy buzzwords.

Ain't Nobody Got Money For That!

      It took 4 hours before I had someone doubt the ability of Millennials to invest. It came from a Millennial, on Facebook (that now old-school, quintessentially Millennial social network) in public. Millennials don't have money for investing. We simply don't. Wages are depressed, loans are sky-high, cost of living is only increasing. I understand. We don't have money.
      Follow me for a moment, however.
      You can open a TradeKing discount broker account for $500. That's approximately 100 hours of work on a minimum wage job minus taxes ($7.50*100=$750. $750/.30=$250. $750-$250=$500.) I understand that's a lot of money when working a minimum wage job, but possible.
      Now let's invest it in an index fund. An index fund tracks the movement of a major index such as the Dow Jones Industrial or the S&P 500. A standard S&P 500 index fund will average approximately 10% over the long haul (30+ years). Which is fortunate, because we are going to plop that $500 into the index fund and just simply leave it for 40 years, from age 25 to age 65.
      Guess what? That $500 is now $22,630. Compound interest is a powerful weapon, at least over the long run.
      Now let's add a small amount of cash a month. Let's say...$50. Suddenly, your amount at 65 years old is $315,000. The massive difference is due to the addition of extra principal at a mere $600 a year.
      But I'm actually a greedy 25 year old. I decide to give up my coffee habit, which is costing me $4.25 a day (Starbucks, you are the worst thing to happen to wallet since adulthood). That's $128 a month. That little addition (a mere $4 a day) makes your final return $1,062,000. You can play around with these numbers all day long, with greater or lesser returns.
      The point is that you don't need a lot of money. I suppose you do if you want to be richer than Buffett or you need a million dollars tomorrow to pay a very massive electric bill. But money has diminishing returns above a certain limit, so what is a normal person to do with more than a couple of millions?
      Aha! say some. But inflation is eating into that number at all times. This is very true. The 10% figure stated above is actually a pre-inflation figure. Inflation is a measure of the growing devaluation of currency, and it averages about 2.0% a year. The post-tax, post-inflation figure is 8.5%. If you plug this rate of return into a good investment calculator, it will give you a rough equivalency of what your money will feel like in 2055, evaluated in today's dollars. So you will technically have $1,062,000, but it will feel like...$698,000 of today's dollars. That should be enough to keep you happy, healthy and fed for a long time into retirement. Even if you had to live on the interest every year, it would feel  like $54,000.
       So no matter how old and creaky we are in 2055, a mere $500 today and $178 a month from then on out should take care of retirement. The rest is all gravy. I could be wrong, of course. The global economic system could entirely disintegrate, or aliens could invade, or environmental collapse could destroy the entire known economic system. But this is incredibly unlikely.
       What is far, far more likely is that the stock market will increase between 7.5 and 8.5% after inflation. And anyone putting $178 a month away will have a comfortable retirement. This isn't a get-rich-quick scheme or a risky investment strategy. This is probability and compound interest and simple math.

Session 4: Video Game Investing: Quantopian

    So far, I have concentrated almost entirely on user-facing investment platforms. But what if you have some coding skills and some inkling of a market strategy? Then, you may be ready for Quantopian. Quantopian is the World's First Open Source Hedge Fund. In other words, you are allowed to program your own trading algorithms and, shocker, keep the profits. There are really only two requirements: you must be willing to learn Python and you need to have a lot of patience.
    Quantopian opens up several new avenues in investing. Historically, the most expensive part of algorithmic trading has been the data for backtesting. Having good minute-to-minute data is expensive and this is how algo firms like Renaissance have kept an edge over everyone else. Well, that and hiring the best talent money can buy. Somewhat mysteriously, Quantopian has obtained fantastic minute-to-minute data back to 2002. They offer this, for free, to the Quantopian community as well as a nice Python platform and a link to Interactive Brokers.
    The Quantopian Community is, in fact, the best part of Quantopian. It is full of experts in programming, business, algo-trading, computer science, math, statistics and similar subjects. You can learn from their posts, their weird attempts at high-powered algorithms (6000% returns with 36,000 times leverage anyone?), and especially their interesting research articles that they based their strategies on. A relative beginner, such as myself, can learn a lot just by following along.
    Furthermore, you can "clone" an algorithm from someone else, tweak it a bit, and enter it in a Quantopian contest to manage $100,000 of their money. All profits, if any, go to you if you win the contest. Supposedly, this helps Quantopian find managers for million dollar portfolios, but this is a plan for the future. While knowledge of Python helps, you can go in with only some basic common sense and a willingness to learn and find yourself an algorithmic trader.
    There are, however, some downsides to Quantopian. The first is whether you believe algorithmic trading is the "disruptive" force some claim it is. High frequency trading (the practice of slicing a few cents off of each trade based on an algorithmic model predicting market swings) is almost entirely unprofitable for the small time investor, requiring super computers and fiber optic cables beyond the budget of the average small country. Low frequency trading, on the other hand, is only as good as the system it executes. Either way, this requires technical knowledge of the markets and of algorithms. If you don't have both, you might as well kiss your money goodbye.
     The second downside is the fact that no one currently knows the Quantopian business model. Quantopian is not a broker and does not charge commissions. It has plenty of venture capital funding, but no known way to capitalize on the broad open source base of its community. The algorithms legally belong to the user, as per Quantopian's own contracts. How, precisely, will this open source hedge fund make money? Or is it simply a platform project drawing like minds together? The jury remains out on this one, as well as algorithmic trading. I'm not entirely sure this one is video game investing, per se. It is more like developer investing, but that's part of the fun, isn't it? 

Session 3: Video Game Investing: Kapitall

    In this post we finally get to my favorite stock screener of all time. Kapitall is the most explicit about the connection between video games and investing. It's blatant motto is "Investing for the Rest of Us." There is an in-game reward system built around Koins, which allow you to purchase virtual portfolios and various "boosts" for your trading performance. You can level up, which earns you more Koins, and so forth. The setup is very intuitive and gamer-friendly.
    Which brings me to that stock screener. The stock screener is extremely intuitive. You simply open it up and begin manipulating sliding bars. There are technical indicators (rolling averages, highs, lows) that are not confusingly labeled (a Bollinger bond is what, precisely?). There are also valuation and fundamental indicators such as PoP, P/E, book value per share, etc. Each one is accompanied by a simple explanation is layman's terms, but without an attempt at influencing a trading decision. If a stock makes it through your screen (I am a fundamentals investor, so I set up at a minimum a P/E screen, a book value per share, a dividend yield, an earnings growth screen, and a price screen), you simply send it to your "playground," from which you can put it in a practice portfolio or enter it in a monthly contest.
     I have not used Kapitall for living trading, so I do not know if there are any issues on that end. The intuitive ease of the screener, however, combined with the simple layout makes Kapitall a lot of fun to work with. If I wasn't getting a fantastic rate from my broker (USAA, thanks to a military family), I would probably use Kapitall as my primary broker. If you are a particularly arcane trader and like obscure technical indicators, this is probably not your thing. Since day trading, at least, is historically not profitable for the average person, I would recommend dropping day trading and most forms of technical analysis before dropping Kapitall's fantastic screener. But, as they say, history will bear out if I am right.

Session 2: Video Game Investing: Motif Investing

     If Investopedia is stodgy and old-school, Motif Investing is new establishment, Silicon Valley change-the-worldism. It opened to great fanfare in 2010, with Hardeep Walia (formerly of Microsoft) as CEO. This is a bona-fide broker that allows you to place orders to purchase "Motifs" of stocks based on a hodgepodge of strategies and beliefs. There are a lot of great things going on with Motif, as the press is never weary of reminding us. It has also been widely panned. Much of the controversy is based on the Silicon Valley notion of "disrupting" in the way that smartphones, personal PCs and the transistor have disrupted our lives. There are, however, things to both admire and critique about Motif outside of this debate.
     My favorite feature of Motif is its most iconic. You can bundle together a set of 30 stocks using some investment strategy and then invest $250 into it. Motif has the entire process in-house - screening, bundling and so forth. This essentially turns every investor into a mutual fund manager. You can buy Motifs developed by Motif (see what they did there?) or you can develop your own or you can purchase in-house some from the 100,000 amateur mutual fund managers in the community. You can weight stocks according to your preferred strategy, including in "custom" versions of professionally built Motifs.
     You can build a Motif around any traditional or non-traditional investing strategy. Do you think corporations headed by women make more money? (They do.) You can invest in a Motif that only includes corporations with a female CEO called "No Glass Ceiling." Do you want to invest in environmentally friendly corporations? There is an entire section of the catalog called "green investing" with such Motifs as Fossil Free and Climate Change. Want to retire in 2035? There's a Motif for that.
     Another feature that I, personally, love is the Creator Royalty program. Say you go through the effort of building a brand-new Motif based on a certain strategy (how about the number of women on the executive board?). You can post it online for others to peruse. If they like it enough to want to invest, they can purchase it for $1. You receive this as a royalty for your hard labor. I imagine that a fantastically successful Motif-creator could make a small sum at this, as you also make $1 every time you "rebalance" your Motif. People are allowed to trade out if your rebalance too often, however. As a buyer, you don't have to pay a royalty if you "customize" the Motif, allowing you to set up a Motif for essentially Motif's commission and nothing more. And if you can't find a Motif, build it.
     All of which brings me to the two major negatives behind Motif Investing. The first is also its greatest strength: the community. The primary forum, called the dashboard, is being hijacked by interested parties constantly hawking their Motif. It's natural to brag about a nicely performing Motif (I've done it myself), but there is a serious danger that some of these people are manipulating Motif's strange method of reporting "returns". There are Motifs that are supposedly returning 100% in the past year, something Warren Buffett is struggling to do. I recently saw a Motif with a dividend yield of 16%. This is almost impossible unless a share price is collapsing versus a small dividend, i.e. you're trading penny stocks. There are a lot of posts by "newbies" to the tune of, "I'm a little confused by all the people hawking outrageous rates of return, can someone help me?" I fear that this aspect of the community will eventually kill the open source, 21st nature of the project.
      The second flaw is the Motif tax strategy. You can't reinvest dividends (a fantastic long-term investment strategy), which means dividends will be taxed. Similarly, "rebalancing" a Motif will result in capital gains tax, since you are often selling and buying stock. Despite the language of disruption, you could end up with the same high fees that has led many investors away from mutual funds, but owe them to the IRS instead of an investment management company.
      For these reasons, I think Motif is a long-term investment company, not a short term trading company. It is also a fantastic way to paper trade with baskets of stocks and experiment, and if you are incredibly good you might make a little money from royalties.
     

Session 1: Video Game Investing: Investopedia

      I believe the investment world is changing. Whether it is the influx of Millennials, the crash of 2007 or the increasingly automated world of professional trading, the "stock market" as it has been traditionally understood is changing. Millennials are earning less than previous generations and are delaying buying a house and investing in real estate. Many, many commentators have observed this. A few have, perhaps condescendingly, concluded that Millennials will be more comfortable with a video game format over, say, a traditional brokerage format. They propose allowing Millennials to treat paper trading, and live trading, as a game that can be manipulated in the icon-heavy world of Millennial tech culture. I have been dabbling in these "video game" sites for a few months. Today, I will review Investopedia, the first I ever tried.
      Investopedia is easily the most traditional of all the paper trading sites I've used. It allows, first of all, for the trading of stocks, bonds and options. Stocks can be held long (i.e. held while gaining value) or be sold short (betting a stock will go down and borrowing from a broker to capitalize on this). This is a very convenient way to start an investing career, since it allows you to dabble in several different types of trading and investment without having to face real losses. Investopedia has no live brokerage attached to it but you can compete in investment games against other traders.
     Further helping Investopedia's "starter" reputation is the fact that there is an extensive, almost exhaustive, encyclopedia of every investment and trading strategy, term and process used throughout the entire investment world. In fact, I have seen reputable investment firms and funds reference Investopedia articles, making this a sort of clearinghouse for definitions and processes. When I first started investing, I went to Investopedia constantly to figure out how things work. I still reference it whenever I run across a concept I am unfamiliar with.
      There are a few annoying quirks to Investopedia's trading platform. The first is the way it places market orders. Market orders are orders to buy a stock at the market value, i.e. if ABC Manufacturing is selling at $57.13 a share, a market order buys at $57.13. A limit order or a stop order, on the other hand, would buy a share once it hits a certain limit either going up (buy ABC Manufacturing at $58) or going down (buy ABC Manufacturing at $57). You can mix and match these orders in any form you want (buy ABC Manufacturing if the price reaches $57 but not if it fall below $56, etc). Investopedia, unfortunately, allows you to place orders into the system without checking to make sure you have enough cash on hand. In other words, you could place a market order for 1000 shares of ABC Manufacturing at $57.13 at a cost of $57,130. If, however, you only had $56,000 on hand in the portfolio Investopedia simply cancels your order without notice. This is only an issue if you are trading after hours, but I once missed a 24% jump in Chicago Bridge and Iron Company stock due to setting a market order slightly above my cash limit and walking off to work.
      After the market order quirk, the only major quirk is the way Investopedia automatically assigns you margin. Margin is cash lent by your broker to you so that you can purchase more of a hot stock. It can be extremely useful if you pick a winner. If XYZ Chemical leaps from $20 to $30 and you own 100 shares, you have gained $1000 (20*100=2000, 30*100=3000, 3000-2000=1000 profit). However, if you can borrow from your broker, there is a chance you could purchase 200 shares. Your profit is now $2000, minus whatever commissions and fees your broker charges for using margin. Theoretically, you could double or triple your return.
      The opposite is also true, however. XYZ Chemical could go from $20 to $10 a share. If you only paid cash, you would lose $1000 (20*100 still equals $2000, 10*100 =$1000, 20-10=10). If you were buying on margin, however, you might lose $2000. Your broker does not like losing money like that, especially since you lost the entire $1000 he/she/ze (there should be a pronoun unique to "indifferent corporate moneymaker") lent you. The broker might demand to be paid back the $1000, and since you only have $1000 worth of securities left (100 shares times the current price of $10=$1000) you will have to pay over everything you have. Your loss is 100% and you are now signing up for Mechanical Turk projects to pay your rent.
      Obviously, margin is a two-edged sword (I don't like it and don't plan on using it). The federal government has restricted use of margin to investment accounts with 6 months trading experience so that you don't accidentally delete all of your retirement savings in your first trade on the stock market (for why the federal government should care, see Herbert Hoover circa 1929). Investopedia, however, assumes some degree of market competence and assigns you a 100% margin account. You automatically have twice as much cash as the "game" gives you. Which, when you are trading well, is fantastic (I have an account supposedly giving me 50% returns despite, you know, Greece...and China...and the almost complete disaster that is Saudi Arabia and the USA squabbling over oil). When your trading goes poorly, however, you end up with triple digit losses and theoretically owing more than the entire value of your account. I mean, this is paper trading so no one has to pay that bill, but it can be depressing when you're just learning the markets and you can't get out of the negative returns.
      My final complaint with Investopedia is its stock screener, or lack thereof. You have to know what stocks you want to purchase before coming to Investopedia's stock simulator. In my case, I ended up using a fusion of Yahoo! finance, my broker's screener, and market watch.com. However, this required a lot of tinkering before I figured out what I was doing and kept my learning curve much longer than necessary.
      All in all, Investopedia is a great place to start. You can learn a lot, fast, if you're willing to do that 20th century BC thing called reading. However, as I will mention in later posts, there are faster, more intuitive ways to screen stocks and paper trade. Investopedia is best kept at what its name implies: an encyclopedia dedicated to investing.

Hello and Welcome

       Allow me to introduce myself. I am a public school teacher interested in learning about and profiting from investment ideas around the world. I am not an investment professional and have no professional training or ties to the investment management world. I am a young (mid-twenties), precociously middle-class investor who simply wants to maximize his income stream.
       My goals for income maximization are simple. Wages are stagnant (especially in education). The cost of living ticks upward at an average of 2% a year. There is proportionally less money being handed out in the great job lottery, so I need to make each nickel and dime sing as they lay golden eggs. It's really the only way I personally to both work a job I love (teaching) while also having a prosperous future. Also, being rich would be a nice thing.
       I think investment blogs and information sources suffer from a bad reputation. There are hordes of smooth-talking "entrepreneurs" seeking to "make your best now" and lead you to the Promised Land of Easy Money and Sweet Living. That is not what I'm doing here. I'm not selling an investment strategy, a book, a "financial freedom" seminar or anything of the sort. I'm genuinely trying to figure out how to best invest my money in the 21st century to fund my retirement account, to build lifetime opportunities for myself, and because I am simply interested in investment and the stock market.
        I named this blog "21st Midas" because I would love to become the 21st century's King Midas. According to legend or history, Midas was the King of an ancient Greek kingdom. Everything he touched turned to gold. Unfortunately, he had an unfortunate run-in with his beloved daughter, who was instantly turned to gold as well. I'm hoping to learn how to make money like Midas without the family troubles. This blog is my saying to sharing anything I find with the wider public. I do not receive any financial remuneration except Adsense traffic (if and when I enable that).
       Also, call me paranoid but I want to make a final disclaimer that nothing on this blog is a recommendation to buy, sell, manipulate or otherwise interact with any investment strategy, equity, contract or financial vehicle. I am not an investment advisor and should not be treated like one. I will be reviewing investment strategies, investment websites, investment techniques, even individual stocks. I do not condone or support anything I talk about in this blog. I am trying to be as neutral as possible, but even when I am not it is the buyer's due diligence that wins the day. After all, I am a newbie at this.
        I am starting first with the very basics. When I started almost ten months ago, I had no clue how to even open a brokerage account. I am going to review the types of accounts currently available, proceed to some investment strategies and then generally update the world on my investment success (or lack thereof). Come and go as you please. This will probably be a multi-year project and I hope to create a discussion forum on investment topics.
        If you have a thought, suggestion, comment or question, feel free to leave it in the comments section. I do ask that any hateful speech be kept out and please, please keep politics out of the comments. Ordinary people are not able to influence the operations of governments and presidents and financial executives. I do not look for a magic genie from any of them, so please don't get mad when they inevitably let us down. Democrat, Republican, libertarian, communist or whatever you call yourself, let's be civil and not blame others for our own lack of options.