"Covestor" Tracking Added

I don't usually read the Wall Street Journal cover-to-cover, but had several wi-fi-less hours to kill on the way back from FOO Camp earlier this week (always a tremendous experience, though Larry Page arriving by helicopter was a bit surreal). Had I been in more of a hurry, I might not have otherwise spotted an article mentioning a new website called Covestor, which lets you track the (audited) trades of other investors.

I'll continue to update my holdings here, but you can now also monitor my holdings as tracked by covestor (see the sidebar on the main page of this blog). What I'm most excited about is that covestor plans to offer the ability set up automated "following" of another member's stocks if you like their style (hint hint). More details on the covestor site.

I'm especially impressed with covestor's savvy in offering easy-to-use blog widgets -- such tools are a big part of the success of many social networking sites (of which covestor is really just a variant -- a financial Facebook).

Note that I just created the covestor account a few days ago, and they don't do retroactive performance, so the data's rather sparse right now. That will of course improve with time.

This round's pick: PMTI

As you know, in keeping with the LBTBTM strategy, roughly every two weeks I pick up another stock, with the intention of holding for approximately a year. This time around, it's Palomar Medical Technologies, which makes lasers for cosmetic use (hair remove, varicose veins).

Their market cap is about $645M, and the MFI screener calculates their pre-tax earnings yield at 8%, and their pre-tax return on capital at over 100%.

My current holdings are posted here, and my 1-year performance (as of today) is at right. More details on how that performance is caluclated is available from the FolioFN site.

P.S. -- Don't forget the fine print.

First Scheduled Sale of Stocks -- Some Winners and a Big Loser

If you've read my previous post summarizing my first-year results, you know it's been a pretty good year. Part of the Greenblatt strategy is to hold for roughly a year, which means for the first time, I've been selling as well as buying.

Here's the stocks that were up for evaluation:

• HNR -- -27.60%. No longer on the MFI list. A definite sell.
• RATE -- +19.4%. A small impulse purchase that wasn't part of the MFI list, but up nicely anyway.
• ELOS -- +21.58%. Selling to capture the gain (at the more favorable long-term tax rate)
• XJT -- +5.86%. This one's a bit trickier. It's been up much higher over the past year while I held it, and it's still appearing on the MFI list. I've decided to hold on to it for now.

I've also added previous holdings to my holdings report for your enjoyment. You'll notice JH on there, appearing as sold well before the 1-year mark -- JH was acquired while I was holding it, and I got a nice 40% premium over my purchase price (which is in fact the average premium paid in an acquisition).

The Power of Padding (your checking account)

Over the past 3 years, my wife and I have done a lot to improve our financial wellness, from online banking to Roth IRAs (however small the contributions).

But perhaps the single most useful things we've done was also probably the simplest (note I didn't say easy -- running a marathon is very simple: you just run for 26 miles; that doesn't make it easy). It was a tip we'd heard in one form or another before, but really picked up from the excellent book, All Your Worth.

The tip? Pad your checking account with an extra $1,000. Most financial books recommend saving 3-months' worth of living expenses as an "emergency reserve". I don't personally know anyone under 30 who has actually managed to do that, though I'm sure they're out there somewhere. And if they are, they have little use for financial advice books, since they probably wrote one. But $1,000? Sure it took us longer than I'd prefer to admit, but we did it. And it made a world of difference.

No more worrying about bouncing checks, or rushing to make a deposit before a bill was due. Just a warm fuzzy feeling knowing that if the car broke down on a road trip and needed a new radiator, we were prepared to handle just such an emergency without a credit card.

The (admittedly minor) contribution I'd like to make to the suggestion is in the mechanics of how to fool yourself into forgetting that $1,000 is there. It's very simple: just make an entry in your checkbook as if you'd written a check (or actually write the check if you'd like) to "Cash Reserve" or something similar. In fact, if you don't currently have an extra $1,000 to put into a reserve, then writing checks in smaller increments for a few months might be a fairly painless way to build one up. This way, when you balance your checkbook, you don't have to remember to add (or was that subtract?) the extra money -- it just shows up as an uncleared transaction.

In the grand scheme of things, it was a pretty minor thing. But it was a great milestone to reach, and gave us the motivation to go further toward setting and reaching our financial goals.

More reason to keep an eye on GOOG

On NewsFactor (via Google News of course):

"The continued growth, on top of the record growth of 2006 and despite advertising's traditional sluggish first quarter, demonstrates the growing significance of interactive advertising to the overall advertising and marketing industry," David Silverman, a partner at PricewaterhouseCoopers, said in a statement.

Nuts and Bolts: How I Implement the Greenblatt Strategy

Greenblatt's book is a little vague on the day-to-day mechanics of how and when to buy the recommended stocks. This post explains in step-by-step detail how I've chosen to implement the strategy. This is what I've found is best for my situation -- there are other options that may better suit your particular situation, and your mileage may vary.

1. Open an account at an online discount brokerage that allows for partial purchases. You want someplace cheap, and someplace that will let you purchase specific dollar amounts of a stock, not just specific numbers of shares (so that, for example, you could invest $100 every 2 weeks, regardless of the price of the particular stock). I use FolioFN, but ShareBuilder is another good choice, and there are others out there.
2. Set up automatic deposits into the brokerage. When it comes out of your paycheck, you'll never miss it.
3. Every 2 weeks (or with every paycheck, if you're paid monthly or bi-monthly), pick up a new stock, using the choices listed at the Magic Formula site. You may certainly want to consider what I've chosen, but by all means, pick what you're comfortable with. Remember, these are all "good" stocks, and if you're going to hold 20-30 of them, don't sweat any single pick.
4. Hold each stock for a year. If the stock is down, sell it just before the year is up; if the stock is up, wait until just after the one-year mark (to receive the more favorable 15% long-term capital gains rate).
5. Remember, you're in for the long run. The minimum investment horizon for the plan described in LBTBTM is 3-5 years.
   
6. Finally, don't invest what you can't afford to lose. While I'm understandably excited about how my stocks have been doing, this is "risk capital" -- I'm still putting my "real" savings into a 401(k), in a diversified mix of index funds, bonds, and mortgage securities.

Disclaimer

Just a reminder:

I am not a registered investment advisor or broker/dealer. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. I can't be liable for any loss or damage caused by your reliance on any of the information from this blog/site. You are solely responsible for your own investment decisions.

This round's pick: USNA

In keeping with the LBTBTM strategy, every two weeks I pick up another stock, with the intention of holding for approximately a year. This time around, it's USANA Health Sciences, which makes nutritional supplements and personal care products.

Their market cap is about $675M, and the MFI screener calculates their pre-tax earnings yield at 10%, and their pre-tax return on capital at over 100%.

My current holdings are posted here, and my 1-year performance (as of today) is at right. More details on how that performance is caluclated is available from the FolioFN site.

P.S. -- Don't forget the fine print.

Why I'm still bullish on Google

Three years ago when Google went public, I was in the middle of writing my book and had a little bit (I emphasize "little") of advance money burning a hole in my pocket, and felt pretty good about Google's prospects.

But we also needed a new couch.

Which, if you've ever owned a 4-year-old futon, you know is a pretty compelling use of some excess cash. What to do?

On the one hand, at the time I had never purchased stock directly (only through my 401(k)), and was a bit intimidated by the mechanics of the IPO. On the other hand, I worked (and still do) in technology, and knew I wasn't alone in thinking there was a lot of good stuff coming out of the Googleplex.

In the end, instead of buying the minimum 5 shares ($425 at $85 each), I bought a couch and two ottomans (which oddly enough were delivered in a box--the only way they'd fit up the teeny-tiny stairs into our teeny-tiny apartment at that time).

Of course, hindsight's 20/20, and while it's a bit annoying to know that $425 would now be $2,535 (as of closing today), I still think there's plenty of upside potential. True, GOOG is already up 496% from that IPO price to $507, but hear me out:

• Google today is often compared to the Microsoft of the 90s -- high growth, high excitement, at the epicenter of innovation and a darling of Wall Street. Microsft's stock has split 9 times, with one original share equal to 288 current shares. So even though Microsoft is now trading at $30.72, had they never split their stock (just like Google), they'd be trading at $8,847 (yes, yes, I know that comparison is a bit of a simplification). So why isn't Google there now? Good question; that leads me to my next point ...
• Microsoft had a much more predictable market, a relatively straightforward business model, and clear competitive advantages. An analyst could look at year-on-year growth, compare it to the potential market for operating systems and office applications, and feel fairly confident in the resulting valuation. Not so for Google. Their business model and strategy don't make a ton of sense to many people, and in an industry scarred by the dot-com meltdown, there's always some degree of fear that the bottom's just going to drop out again. And there's also the argument that Google doesn't have a clear competitive advantage, when Yahoo!'s free and just a click away. Never mind that Google's culture and atmosphere would be difficult or impossible to clone, there are more concrete examples of their competitive advantage to be found (another great one here, and one more here).

I may have missed the boat on the Google IPO (a mistake I fortunately was not over-eager to repeat with Vonage, though I came close -- until I read their financial statements), but I did eventually get on board with Google, and plan to be there for a while longer.

Then again, it is almost time for a new couch ...

Yodlee MoneyCenter -- great tool, but hard to find

If you're like me, you've got a dozen or more online bank accounts, retirement accounts, investment accounts and credit card accounts. Enter MoneyCenter, from the oddly named Yodlee. It's nearly impossible to find that link from the Yodlee site -- the MoneyCenter link there is for financial institutions, Yodlee's real customers. In fact, chances are you already use Yodlee software through one of those dozens of online accounts.

MoneyCenter aggregates all of your financial accounts into a single dashboard, and is already set up to work with most bank and credit card sites. MoneyCenter can notify you by email if your balance falls below a certain amount, or if there's a particularly large transaction in one of your accounts (which might indicate fraud). But one of the nicest features is free bill pay, which has become increasingly hard to come by -- especially if you want something not tied to one bank.

Oh, and did I mention it's free?

One-year performance -- not too shabby

It's now been a year since I started investing using the Magic Formula method, and the results are pretty encouraging (1-year performance on top, with 6- and 3-month below).

Bear in mind this does not include the fees I pay for using FolioFN, but those are quite reasonable ($200/yr for 200 free "window trades" per month), and don't have a significant impact on my results.

More about how these results are calculated from the FolioFN site.

Looking at other time periods (6-month and 3-month are the bottom two), what I see is performance that tracks the overall market, with a gradual increase in overall value fitting with the LBTBTM contention that these stocks are undervalued, and that the market will realize that and increase their price over time.

Adventures in "Magic Formula" Investing

About a year ago, while browsing the business books at Borders, I came across "The Little Book That Beats The Market" by Joel Greenblatt. The premise was nothing new (that you can regularly outperform the market), but his method and approach (using two relatively simple measures of performance and price) intrigued me, and I saw it as an opportunity to use what I was learning in my Finance classes.

Using FolioFN, a discount broker that allows for partial stock trades (buying just $25 of Google stock for example), I started using the formula. A year later, I'm pretty impressed with the results.

I found myself telling more and more friends and family about the book, so I started this blog as a way to share my experiences with them, and anyone else interested.

You can view my current holdings here, but keep in mind there are a few deviations from the book's approach:

• I own some Google stock alongside the MFI (Magic Formula Investing) stocks. I've since been purchasing Google in a separate brokerage account.
• It also includes some (very very little) in Bankrate.com. The impact on overall performance from this one is negligible.

Finally, here's some fine print:

Please note that I am not a registered investment advisor or broker/dealer. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. I can't be liable for any loss or damage caused by your reliance on any of the information from this blog/site. You are solely responsible for your own investment decisions.

Financial Hacking -- Giving Creative Accounting a Good Name

Originally posted on the O'Reilly Radar, this is a post I wrote about the positive side of "creativity" in finance and accounting:

Financial Hacking -- Giving Creative Accounting a Good Name

An excerpt:

Most people have a negative opinion of "creative accounting" in much the same way that most people have a negative opinion of "computer hacking", and I think there are some surprising parallels there. Yes, there's a lot of bad actors, like Enron's Andrew Fastow, using financial shell games to enrich themselves and conceal their actions (kind of a financial root kit). But there's also been -- and continues to be -- some amazing innovation, which perhaps is viewed as guilt by association or "too complex" for the general public to understand (again, sounds a lot like perceptions of computer hackers).

Welcome

The Rule of 72 is a way to estimate the time for an investment to double (or halve), and that seemed like an appropriate title for a blog about investing and personal finance.