Thursday, October 31, 2013

The Twitter IPO Is Almost Here

Happy Halloween! It’s almost November and the Twitter initial public offering (IPO) is almost upon us. Twitter will trade under the symbol TWTR on the New York Stock Exchange (NYSE). Many investors have been looking forward to the Twitter IPO because they believe the stock may “pop” (go up significantly) on the opening day of trading. Some people will sell and take a quick profit if the stocks really moves. Some people might want to sell but can't because of regulatory restrictions on their stock. Most people will buy the stock at the inflated price on opening day and hold on to it. Of course this all assumes that TWTR is priced correctly and trades far higher than its initial offering price. We all know you can't assume anything with IPOs or with stocks in general.

The New York Stock Exchange has been preparing and testing their systems to avoid another fiasco like the one with the Facebook (FB) IPO in May 2012. Maybe Twitter management chose the NYSE over the NASDAQ market because of the fear of having similar problems. We'll soon know how smoothly the IPO process goes for Twitter as well as the NYSE and we’ll know how accurately the shares of TWTR were priced. Twitter seems to have good IPO buzz because it is a micro blogging site where users can posts short messages (140 characters) about any subject they like and share it instantly with the world. The world is abuzz about Twitter and its new shiny stock.

Should we really be this interested in a Twitter IPO? Can TWTR live up to the hype? Will TWTR continue to do well after the initial day of trading or will it fall to a normal trading level and just stay there? No one really knows. I’m not so sure Twitter should be a stand-alone company, never mind going public. Yes more than 200 million people use Twitter on a regular basis and I am one of them (@PJSacchetta). There is no charge to register for a Twitter account and there is no charge to use the service. As far as I know they are not planning to charge users any fees. They plan to make money from sponsored tweets; a tweet is what they call a 140-character message that users post on Twitter. Sponsored tweets are just another way of saying paid tweets or just plain ole advertising.

Most people have liked Twitter from the start because they could rely on real people tweeting real information in real time without any funnel or editing. Breaking news has been posted on Twitter before any other media source. All kinds of important information has been posted on Twitter and then re-tweeted or shared through many other media outlets and sites. You can tweet from a computer, tablet or mobile phone. It’s quick, easy and convenient for most people. This is why I think that monetizing Twitter may not work well enough to justify a stand-alone public company. Will many people get turned off by seeing more advertisements? Will Twitter become just another site with tons of ads?

Sometimes we need to assess the facts as they are and not as we would like them to be or become. I’m sure the founders, management and early investors (venture capital) want to become super rich with their publicly traded stock or cash out. This is the American way. They have every right to list their IPO and take their chances. The question remains “is this the best course of action for the company”? Based on the mass of users who pay nothing to use the service and expect unfiltered tweets to be posted instantly, is there really a business model that can sustain long-term independent success?

Is this IPO just a way for the Twitter founders and investors to cash out quickly while retaining the ability to be bought out at some point later? A company like Google (GOOG) would be a great home for Twitter. Google already knows and understands how to monetize web sites and services. I'm sure I'm not the first person to think or suggest Google buy Twitter. I just believe that being publically traded is not the ultimate sign of success. There are many very successful companies that are privately held which have huge revenues and profits but that choose to stay private. In the case of Twitter I just don't see how the site can be monetized in a way that would keep the original site design in place. We'll find out soon enough. As always, on Monday morning all the quarterbacks will tell you exactly how the game should have been played the day before! Trick or Treat?

Thursday, October 24, 2013

Others Ask If This Is A Great Investment; I Ask Is This A Great Investment Now?

After hearing the current events of the past week in the financial field it made me wonder if most people understand the concept of when profits are made with any form of investment. We saw stocks like Google, Amazon and Microsoft do very well after announcing quarterly results. Google (GOOG) shot up 14% in one day (Oct 18th) to close over $1,000 for the first time. The market value increase in Google stock in one day was greater than the total market value of most publicly traded companies. What changed from one day to the next that investors quickly decided that Google should be worth 14% more that day? Was Google stock really worth that much less only two days prior?

This question is at the heart of understanding what makes Wall Street tick. One would imagine that folks who invest money professionally do so in an unemotional way and only focus on facts and figures. If this were true, how do you explain a stock moving 14% in one day? Many stocks don’t move that much in months or a year. Is it possible that these professionals had no idea that Google would announce the numbers they did? Emotion made people take profits and other people jump on the bandwagon. Gordon Gecko would call it greed. There is only one way for you to have made a 14% profit on Google stock on that day…you would have had to purchase the stock at least the day before. Simple right?

What’s my point here? The profit on Google stock was not made on Oct 18th, the day it shot up so much. It was made on the day whoever bought the stock before October 18th. Profit in stocks is determined at the time of purchase rather than at the time of sale when the actual gain is realized. The calculation of your profit in any stock trade is dependent on the price you paid versus the price at which you sold. This is very similar to the market value of homes. Let’s assume the average house on your block is valued at $400,000 today. Who would you imagine would be a happier homeowner, the person who purchased the house at a cost of $300,000 many years ago or the person who purchased a house several years ago at a cost of $475,000? Both are worth approximately $400,000 today. The homeowner who paid $300,000 and sells for $400,000 realizes a $100,000 profit. The purchase price was key to this profit.

The next time you read or hear about a great real estate deal, a great stock, or any other great investment, just remember that every investor’s personal profit is determined based on the date of purchase. This is true of the market returns you hear about every night on the news or see on your smartphone. If you read Yahoo Finance after the market close today (10/25) you'll see that the S&P 500 Index is up 19.81% for 2013 year-to-date. Does this mean that everyone who was invested in a S&P 500 Index fund or ETF is up almost twenty percent? Sure, if you purchased the fund or ETF at the closing price of the last trading day in December of 2012. It is more realistic to assume that people buy investments at different times and sell at different times than the first day of the year. 

None of this is rocket science. We are discussing basic investment facts and pretty easy math. But why do so many investors fall into the same trap time after time? Investors need to buy before the earnings announcement and sell after it if they want to book the profit. Buying a stock after it has already shot up in value isn't necessarily a great investment at that point in time. Others ask if this is a great investment; I ask is this a great investment now?

Thursday, October 17, 2013

Macro vs Micro: A Study in Economics (and Investments)

If you think back to your college economics class, you'll remember the difference between macroeconomics and microeconomics. Microeconomics is the study of people and businesses with respect to the decisions they make regarding the allocation of resources and pricing of goods. Macroeconomics is the study of the economy as a whole including entire industries and economies.* In simpler terms, micro is looking at individuals or specific companies where macro is looking at the big picture. When you research an investment, whether it be a stock, bond, ETF, mutual fund or any other security, you must look at the specific investment as well as the entire market as a whole. Macro and micro forces affect the price of securities on a daily basis.

Let's look at an example. Suppose you wanted to invest in a company that supplied parts or machinery to the oil industry. The individual management of the company would be important to you to ensure effective leadership going forward. The financials of the company would be important to make sure the company will grow, be profitable and which will increase the stock price over time. The product line and the pricing would be important to you so that you would be confident that this company could compete well for new business. The reputation of the company would be important in helping it grow. These are all factors that the individual company can control in some way. Can the company control the price of oil? No! Would the price of oil affect the sales of this company? Yes!

This company you are researching may be the best managed supplier to the oil industry and it might be the most competitive company in its field. But if the price of oil were to suddenly drop precipitously, this company's sales might also drop substantially because oil companies would drill and pump less oil at lower prices. Actually, at this time oil companies are producing and refining more oil than ever before because of the continued high market prices. Market forces drive prices up as well as down. What we are saying is that the stock price for the company you are researching may rise or fall based on macroeconomic conditions that have nothing to do with its own management and financials. This means you are investing in not only the individual company stock but the oil industry and the U.S. economy (and world economy) as well.

Timing is critical to making a sound investment. It is our belief that money is made when a security is purchased not when it's sold. The price at the time you sell a stock represents the proceeds you will receive upon the sale. The profit you make depends on the price you paid when you bought the stock. The key to any successful investment strategy is the discipline behind it. Warren Buffett invests in companies that he can understand, that are superbly managed and which are highly competitive in their respective industries. Once he invests he is committed for long term. He knows that the decision to invest was made based on a sound discipline and that over time his investments will perform. His track record is pretty remarkable.

Building a solid portfolio that outperforms the market is not easy. If it was every investment manager would outperform his/her respective benchmarks. Comparing your investment returns to some outside benchmark is not as relevant as it used to be. Would you happy losing only 10 percent of your portfolio value in a year where the overall market went down 20 percent? No! Simply outperforming some index is not enough. Buying the right stock at the right time and holding on to it will yield great value over time. Sometimes stocks move quickly and sometimes they take a long time to move. By investing in well managed competitive companies that have solid financials you give yourself the ability to outperform the average companies. We strive to do this for our clients every day. We focus on solid investments that we believe will perform well in the long-term no matter what the macro market forces do in the short-term.

Reference *

Thursday, October 10, 2013

What is Washington Thinking? A Special Current Events Blogpost...

It has been more than one week since the partial government shutdown began. We have not seen much movement from either side on getting the situation resolved, either for the short-term or the long-term. Several band-aids were used in order to limit the public outcry such as making sure all our military personnel get paid, the all furloughed government works would receive retroactive pay and that the families of fallen service men and women would receive immediate death benefits. Congress was able to pass these very limited bills because of the overwhelming public support but that's about as far as they have been able to go in more than 10 days.

You might be wondering why this is able to happen so often. The answer is rather simple. We allow it to happen. That's it; plain and simple. Our country has come to a point in time where everyone is concerned mostly about the issues that concern them in the most direct way. We built this country by putting the country first. During World War II all Americans sacrificed for the good of the country and to help win the war. What exactly has any American sacrificed during the last 3 Wars except for the service men and women (and their immediate families)? Have we driven less? Have we consumed less? Have we entertained less? Have we traveled less? Have we purchased less? Have we given more? I would say that most Americans have gone about their normal business throughout the first Gulf War, the Afghanistan War and the Iraq invasion. So Congress has responded much in the same way. Why should your Congressman worry about something that does not directly affect his/her district?

Until we, as Americans, begin to act differently our representatives will not change the way they act. They see this as the only way to survive the next election. The U.S. Senate is a more deliberate body and the Senators are more protected from everyday politics because they only face reelection every 6 years. This is only one body. The other body, the House of Representatives, is much more affected by local politics. Each member of the House is up for reelection every 2 years. By the time they get to Washington after one election it's almost time to start campaigning and raising money for the next election cycle. Senators may work together in a more bipartisan fashion but they can't pass any legislation unless the House agrees to go along. This is where you and I come into the picture. We need to convince our representatives that we send them to Washington to protect our interests as well as the interests of the American republic. We need to stop this one-issue style of governing. Yes every issue is important. We all have one issue that is incredibly important to ourselves. This shouldn't mean that we focus on that one issue and nothing else. Sometimes we need to help the other guy and put someone else first. Isn't this what we teach our children?

This governing by the abyss is destroying the full faith and credit of the United States. We are beginning to be perceived more like a banana republic than the most successful republic in history. This needs to stop. The markets have reacted negatively to this governance because no one particularly likes uncertainty. Our elected officials can fight the good fight without threatening to destroy the full faith and credit of the United States of America. Holding the country hostage over raising the debt ceiling is beyond comprehension. Raising the debt ceiling does not involve any new spending by Congress. It allows the U.S. Treasury to borrow money to pay for the expenditures that the Congress has already passed in previous legislation should it not have enough money on hand. This is not something that should ever be debated. The debate should be happening when Congress authorizes the spending in the first place. Again, every House member and Senator has a voice during the legislative process. Why don't they speak up? Not very many politicians want to go against their own party on major spending issues because it could cost them in their local districts. Yes, once again it all comes down to protecting our own self-interests above everyone else's. Are you surprised? You shouldn't be. We quietly rubber stamp this nonsense every day that we say nothing. Nothing will change until we change it.

Thursday, October 3, 2013

Loss Leaders Are Not Only Found in Your Supermarket or Big Box Store

I'm sure you have seen all the discount brokerage ads on television, in magazines and journals...heard the radio ads...and read them on the Internet, on your tablet and on your mobile device.

Each one promising a lower cost per trade than the next. Think about it. Can any brokerage company, whether it's exclusively online or if it has physical locations, survive with the revenue from trades that are priced at $3.95, $4.95 or $7.95? Do you think it's possible for any brokerage company to survive and prosper from selling their trading services for a fee that is lower than what Starbucks and your local ice cream shops sells their products for?

Obviously discount brokerage firms need to supplement the very low trading fee with other revenue. It's like a loss leader in a retail store. A supermarket will advertise a popular item at a very low price to get you in the store. It is their hope that you not only buy the sale item but that you buy many other items at full price, since you are there already. We shop this way and we are used to it. The supermarkets know this. They aren't looking at the profit they make on the sale items but the profit they make on all the items being sold each day or week.

I'm sure you have read the fine print. Don't you think the discount brokerage firm, or any trading firm, has a list of charges for anything else that you may need? Don't you think they plan on making money on your cash while it's sitting there waiting to be invested? Of course in this low interest rate environment making money on idle cash isn't as profitable as it used to be. The low trading ticket charge usually applies to buying and selling stocks or ETFs. What about mutual funds? Is there a "preferred" list from which you can trade without any fees? Why would there be a preferred list? Because the brokerage firm must make money on that list of funds in some other way in order not to charge you any trading fees. Otherwise they would not need a preferred list at all. Compare the expenses for each share'll be shocked when you read the numbers.

Cost is always important. What is much more important is the bottom line. In working with our clients, we strive to use the lowest cost share class available. We don't only consider cost. It doesn't matter how low the trading fee is if you lose money on the trade. Then again, if you make money on the trade, you probably aren't as concerned about the trading fee. The trading expenses should always be considered but they shouldn't overshadow the investment goal. The main point here is that costs are important but the main overriding concern should be to invest in the lowest cost share class of whatever fund or security is appropriate for your situation. When dealing with individual stocks, the purchase price and the selling price are much more critical to your overall portfolio success than the ticket charge.