I’ll always remember my very first investment I ever made.

This was about 12-13 years ago or so. My dad had worked in various levels in banking, from loan origination to VP, and he was, and still is, by all definitions, a workaholic. I remember him waking up very, very early in the morning, checking Bloomberg TV to get a feel for the markets and interest rates that day.

He’d wait patiently for the 10-year Treasury to come up on the screen as various indexes, commodities, and currencies cycled across the right part of the screen. It was just part of the daily routine. I wanted to be just like my dad – I had to know what those numbers meant.

Of course, my dad, being the great dad that he is, tolerated my every question. “Why?” was, by all accounts from my parents, my single favorite question.

Dot com bubble

These were the glory days of the stock market. Everyone was getting rich. Companies were IPOing at a record pace. Webvan. Pets.com. AOL. Yahoo and eBay. It was unreal, really, watching the NASDAQ hit new highs every day.

Even to me, then a 10-11 year old kid, it was the most alluring thing I had ever seen. Very smart people would get on the television and explain why everyone was getting rich. The stock markets were the place to be. No ifs, ands, or buts about it.

Compound interest had always been a fascination of mine after my parents explained that my bank account, which I had opened at 6 or 7 years old, would pay me just to keep money in it. (My goal then was to make $1 per month in interest…I saved every dime I could to get to that point.) But that 4-5% per year, whatever it was, wasn’t the 10%, 20%, or 30%, that stock markets were seemingly set to provide investors for years and years.

I wanted more.

From gambling to stocks

Back in those days I was obsessed with odds and numbers. There was something special about them. I remember devising a scheme that would allow me to beat a table top over/under 7s game at my Catholic school summer social.

Yeah, I can’t believe I’m admitting this either.

It was only after a month of watching Bloomberg, and after maybe a year of collecting coins, that I realized the Canadian dollar was worth less than the US dollar. If I played over or under 7 with Canadian coins, but got paid out in US dollar coins, I could effectively beat the odds, supposing I could buy Canadian quarters and play them as US quarters. (I never did it; something about ethics and taking a church for dollars, one quarter at a time. Although, hey, they were letting the second and third graders gamble!)

The stock market quickly took over my obsession with odds. I wanted to play the odds in equities.

So, I did what any kid should do. I hounded my parents for subscriptions to Money magazine, and, using the internet, signed up to a 14-day free trial to Investors Business Daily. I started getting investing books on every trip to the local library. My dad introduced me to Warren Buffett’s ideas. The simplicity was attractive. I was going to get rich in the markets, I told myself.

I was going to master my dad’s many HP12C financial calculators laying around the house. Combined with my annual reports and library books, how could I fail?

Funny thing about magazine and newspaper subscriptions. Sign up for enough and you start getting really good junk mail. Well, I got an offer from Etrade and the Motley Fool whereby I would get a $100 bonus for just opening an account. That was the turning point. I could invest with someone else’s money.

From Investors Business Daily, I started ordering free annual reports.

Actually, I ordered hundreds. They were free, after all!

So I started cracking them open as they came in the mail. My dad sat with me and helped me digest line-items on an income statement. I’m lucky to have had a father that studied accounting in undergrad and who was patient enough to deal with my every concern and question.

Buying my first stock

Dollar General was the first stock I ever purchased. If I remember correctly, it traded for something like $12 a share, paid a robust $.13 annual/quarterly dividend, and was a model that made sense to me. (Dollar General was taken private and relisted a few years ago or I’d look these numbers up). I remember looking at an IBM annual report, too, but what I had learned in my recently readings and from my dad’s own warnings was that I should only invest in something that I understood.

My dad cautioned that with tech, R&D spending is something to pay attention to, but neither of us knew what that R&D may eventually bring. Suddenly, the cost of goods sold line in DG’s annual report looked much more appealing, and much more understandable than the R&D in IBM’s income statement. So Dollar General it was!

Did I really understand Dollar General? Hell no. I could spit out its P/E multiple, PEG multiple, dividend and dividend yield, and probably tell you way too much about how many stores it had, or its gross margins, but hell, so could Yahoo Finance!

I mean, really, I don’t even care to pretend that the idea of business valuation was something I truly understood as a 11-12 year old kid.

But I did know enough, I thought, to make my first purchase. So I did. And boom! Just like that, everything that had ever enticed me to the stock market hit me like a ton of bricks. I was part owner in one of America’s greatest enterprises, I thought. I was set to be a bazillionaire, just like every other person who puts $100 of someone else’s money (thanks, Etrade!) into a stock of their choice.

Since that time

Not much has really changed since then. I’ve become older, and naturally a little better with the basics of investing and corporate accounting. I’ve self studied ever since that first day, reading everything about investing that I could get my hands on.

I’ve become much better at reading annual reports and finding what really matters in a company’s reporting. I’ve also figured out what kind of stocks I really like, what “cheap” stocks actually means, and found a better understanding of what made Warren Buffett and Benjamin Graham the kings of Wall Street by reading their every book and books on them.

If I were to do it all over again, or start now, I’d probably start with a stock market game. They’re a great (and free) way to learn about stocks and get a feel for how the stock market moves each day. Plus, Etrade doesn’t hand out free $100 bills any more!

What I wouldn’t change is getting hooked early. I remember telling my peers that I wanted to be a stockbroker shortly after buying my first stock. Yeah, in a classroom of future doctors, lawyers, and firefighters, that may have made me the laughing stock, but it’s all in good fun! They just don’t understand, I told myself.

Starting early, either by “paper trading” or committing a very small amount to the markets is a great way to start. I couldn’t be happier that I started when I did. I don’t think there’s a single person in the world who wishes they found the markets later rather than sooner.

A special thanks goes to my loving and caring parents who nurtured my love of finance to the best of their abilities. I cannot thank them enough.

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Quick thought today.

I watched an old (2012) interview with David Einhorn on CNBC. The interview starts with poker and not-for-profits, but quickly delves into such topics as monetary policy, quantitative easing, and Apple’s valuation. I mean, if you’ve got Einhorn in the studio why wouldn’t you talk about the big stuff?

You can find the interview here.

In 13 minutes and change, Einhorn hits on complex topics, some of which I agree with entirely. Some of it I can’t dig, like buying Apple or gold.

At any rate, his comments on low or zero interest rate policy are of particular interest, especially since the markets are on a tear, the deficit is set to plummet, and corporate profits are still halfway decent despite the fact revenue growth is slowing.

Einhorn: low rates hurt economic growth

Einhorn’s comments revolved around the idea that low rates actually hurt the economy more than they help. He says that low rates make it impossible to forecast future income, ultimately delaying retirement and consumption. His fix? Send rates to at least 2-3%, instead of the 0-.25% the Fed is targeting today.

Such a policy would make financing far more expensive than it is right now. Home loans would jump by at least 200-300 basis points. Probably more, actually, since the implication would be that the Fed will only go higher, not lower. Dividend paying stocks would probably take a breather, since Coca-Cola’s terrible 2.8% yield would look much less attractive to so-called “dividend growth investors” if risk-free rates were >2-3%. (Fun fact: Philip Morris, now Altria, yielded more than 19% in 1988.) And companies probably wouldn’t be so hungry to buy up their own shares given the cost of capital would rise tremendously, even for AAA credits.

However, the alternative is that investors would actually get something worthwhile on their invested capital. CDs would start at 2-3%, and go as high as 4% or more for longer maturities. Savings accounts would lift off .0000005%. Money markets would do the same. People who are currently in their 60s – baby boomers – might actually think about retiring, freeing up a job for an unemployed 20-something, of which there are many.

Is it time to listen to Einhorn?

The video ends with discussion on how Bernanke won’t listen to Einhorn (why would he?) and it’s clear higher rates probably aren’t sitting right around the corner. But with equities up, employment up, housing up, food and fuel up, maybe it’s time for a little easing on quantitative easing.

It may not be the end-all solution, but we should always be willing to consider that maybe, just maybe, central planning creates much bigger unintended consequences.

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All that glitters is not gold.

Sometimes glitter takes me for money; sometimes it takes me for opportunity.

What’s up in my portfolio

Those of you who have followed this blog for any length of time know that I’m not too peculiar about where I invest. In 2011, I had virtually all of my portfolio in four micro and small cap companies no larger than $300 million. All but one ended in very favorable acquisitions. In 2012, I went larger cap, seeing opportunities in automakers, offshore rigs, dead animals, and Adams Golf, the only company to appear twice. That mix also proved to be very profitable. I crushed it in tiny names in 2010, raking in 70% total returns. Then 2012 was excellent, reaping the benefits of options on RIG, a buyout of Adams Golf, and a rising Darling International, which I cut earlier in that year at my $18 target.

In 2013, I went with a business development company, a nanocap cashbox, and a shipbuilder. Oh, and the S&P 500, because I lacked any other really good ideas.

So that’s the history. In general, about 90% of my portfolio is invested in my annual top picks each year. I do the Greenblatt thing, for those of you familiar with his “magic formula,” holding most for just over one year in an ideal world.

Some losers and dead money

Ford

Two years ago I said that I was going long Ford in a series that played out for far, far too long. I (foolishly, in retrospect) bought downside protection by going in long-dated calls (LEAPS) and getting eaten alive by decay.

After rolling that position over once, I made out with a profit that only barely exceeded the broad market during the same period while accepting FAR MORE risk because I bought options.

Looking back, I’m not quite sure what got into me. That position was dumped in the past week, and I’m not too happy with it. I dumped it in large part because I didn’t want exposure to large caps given the stock market’s recent rally, but the thesis I originally thought would and should play out has been (finally) adopted by institutional investors, who underowned the stock for much of the recent past. (One automotive analyst complained through the years that no one wanted to talk to him, an indication that institutional investors had no interest in buying autos.)

So, while Ford’s rallying, I have no exposure. Sweet! End result: slightly above-market return for substantially above-market risks.

Apache

I’m nearing a year of holding a small part of my portfolio in Apache, an “acquire and exploit” oil and gas company with assets all around the world. I was sucked in last summer, and the results have been less than impressive.

I’m breaking even on it while the market is up more than 20% in the same time.

I still think it’s a relative value in part because its risky assets overseas (Egypt) are underappreciated by Wall Street, and management has been slow to respond to shareholder concerns. Management outlined a plan that would have the company selling assets to repay debt (capex has exceeded cash flow in a rare event for the company) and repurchase as much as 7.6% of outstanding shares. I like the idea of selling assets to repurchase shares, since the company can essentially sell X barrels of oil and oil equivalents and repurchase X*2 or 3 barrels of oil equivalent thanks to the fact Apache stock is cheaper than the sum of its parts.

I’m still holding on. I like to have some exposure to energy as a general rule (though I don’t always follow through with that), and this is my pick. It also, somewhat, counterbalances the risk to Conrad Industries in that it would benefit from new oil pipelines whereas Conrad would lose some new ship construction business. Apache previously served as a hedge for Darling International, which uses natural gas as a key input.

Learning lessons

Looking back through all my positions, I realize something that is very clear: large caps aren’t my thing. I’ve known that for awhile.

I can get very impatient. I’m especially impatient when things aren’t going my way. For example, all the while Ford’s business was improving, general periods of weakness in the broad market lead to crushed stock prices. No matter how cheap it became, no big investors seemed interested in owning it. Now they want it – and I don’t own it. Woe is me!

Also, options. I just shouldn’t. I accept my hypocrite crown for believing that in the short-term the stock market “behaves like a voting machine, but in the long term it acts like a weighing machine” yet purchasing time-limited options, in effect saying that I don’t care to wait.

I tend not to get so impatient with smaller companies. It is possible to know tiny companies much better than the market. Whether or not I do is up for debate, but of course, when I can buy a company for less than its net working capital, I’m confident I’m doing the right thing. Same thing goes for single digit EV/EBITDA industrial names, or companies trading with earnings and free cash flow yields well above 10%. I (generally) only find such opportunities in very small companies.

My goal is to stay in a fully-invested, concentrated portfolio of companies that, I believe, trade at a substantial discount to the market. The ideal company also has a potential suitor interested in an acquisition. Over time, that has been a winning strategy. I see no reason why that should change.

Luckily, my biggest losers and dead money have been only small parts of my portfolio since I don’t really like large caps, but they occasionally lure me in with the promise of opportunity. That’s the upside.

You can’t win all the time, though I wish I could. What I can do, though, is learn from the investments that slap me across the face every once in awhile. As Buffett says, “If every shot you hit in golf was a hole-in-one, you’d lose interest. You gotta hit a few in the woods.”

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I’m taking a short break. Yeah, I know – a brief hiatus for a blog generally means the writer disappears for months.

I won’t be doing that.

Last December I made a few promises to myself, the most important of which was that I’d be a college graduate in 2013. I’m no genius; school hasn’t exactly been a cakewalk. It is getting easier, though, as I find my list of finance classes much more interesting than general education credits. Rocked my second-ever-in-college 4.0 this semester without buying a book. Feels good.

I’m making a couple sacrifices to get out of school earlier than anticipated. For one, my summer has been sold to the system; I’ll be a full time student this summer, and finishing out 18 hours of 400-level finance and accounting hours this fall. Slap full time work on top of that and…well, it won’t be fun, but at least I’ll be done. Things are looking really good on the job front after graduation, so that’s something to look forward to.

For the next 7 months, I’ve two whole weeks without school. I’m making the most of those, one of which is the next 7 days starting right now. My last final was yesterday and my first summer class is…next Wednesday. Bummer.

In the meantime, kick it in the archives with some retro posts:

I’m fairly sure each of these are at least 2 years old now. Time flies!

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