Category: Investing

CNBC’s 2008 Portfolio Challenge

It’s that time of year again. Time to take part in CNBC’s 2008 Million Dollar Portfolio Challenge!

I entered this contest last year with a few average picks, and when it was discovered that some participants were gaming the system, the whole thing started becoming kinda lame. My final results were okay too: a 5.2% increase. Not bad.

This year, CNBC has changed up the rules because of last year’s cheating. (Interesting anecdote: after disqualifying all the cheaters, last year’s winner, Mary Sue Williams, is apparently still a waitress who is now getting lousy tips – cuz she’s rich, her customers tell her.)

The rules now include:

  • Requiring at least four stocks in your portfolio
  • Allowing up to five portfolios within your account
  • Allowing currency trading in addition to stock trading

Officially, this contest began yesterday. Their website has been marred with outages and problems, however, so I’ve had a hard time getting in and setting up my portfolio. I wonder if this year’s contest is going to be kinda lame too. I hope not, though I kind of think it will, especially with the rough start it’s been having. Bummer.

Green Homes

Highland Homes Like to invest in real estate? Like environmentally-friendly technologies and products? Here’s an interesting venture.

In last month’s issue of Entrepreneur Magazine, they ran an article featuring young (read: under 40) millionaire entrepreneurs. Along with an impressive cast, one of the duos profiled is Bob Shallenberger & John Cavanagh, founders of Highland Homes.

Bob , 37, and John, 38, are fraternity brothers from St. Louis University who both had real estate development experience before banding together in 2003 to create the St. Louis-based “homebuilder with innovative designs, green developments and urban lifestyle,” as they state on their website.

They use green housing methods such as “sustainably grown wood, rooftop decks, underground parking, lots of parklike green space and high-efficiency heating and cooling systems.” Such techniques offer them a competitive advantage as well.

Says Cavanagh about green building, “It’s difficult and it’s expensive to learn. It’s challenging, and there’s some risk in it. We see it as a big growth segment of the market.” Their next move? “Being recognized as the top green residential builder in the country is the goal for us,” he says.

That could possibly happen, if they play their cards right. I certainly agree that green buildings (both residential and commercial) will become a huge market in the future. With the way the environment is going, I don’t think we have much choice.

Highland Homes doesn’t just aim for environmentally-conscious customers though. They also cater to the luxury market. “Each new home comes with a plasma TV and the option of special packages like ‘Elvis Live,’ which includes a stereo, karaoke machine, CD player and iPod Nano.” Another one of their current options, the Super Bowl Shuffle, contains a 50″ plasma TV, Sony Surround Sound, 2 front & 2 rear speakers, center channel & subwoofer, DVD/CD player, a Sony Playstation 3, and Madden NFL 2007.

Not bad. And even better, especially for California Bay Area real estate investors, are some of the prices:

Kilmore Condominiums near St. Louis University (all 2bd, 2ba, 1500 sq ft):

  • 7011 Dartmouth Ave 1FL – $249,900
  • 7011 Dartmouth Ave 2FL – $259,900

6416 Cates Condominiums near St. Louis University (all 2bd, 2ba, 2000 sq ft):

  • 6416 Cates Ave. 1FL – $314,900
  • 6416 Cates Ave. 2FL – $339,900
  • 6416 Cates Ave. 3FL – $359,900
  • 6416 Cates Ave. 4FL – $379,900

Donegal Condominium near St. Louis University (3bd, 2ba, 2000 sq ft):

  • 6404 Cates Ave. 2E – $319,900

Highland Walk Townhomes at The Hill in St Louis (3bd, 2.5ba, 2050 sq ft):

  • 5717 Arsenal St. – $299,900
  • 5719 Arsenal St. – $299,900
  • 5723 Arsenal St. – $299,900

To be fair, I’m not a real estate investor. I just happened to read about these guys and thought it was an interesting opportunity for someone. The prices are lower than the $700k – $1.5M I see in the Bay Area, though I know that doesn’t mean Highland Homes’ prices are a bargain it in St. Louis.

(Also, I have no affiliation with these guys, nor am I getting any money for this. I just thought it was a cool idea. Plus, I like hearing about green businesses.)

There’d be lots of factors to consider if you wanted to buy or invest a green home with these guys. Are their methods sound? Will they actually stand the test of time? Presumably, they will, since the guys are living in homes they’ve built. How are the neighborhoods there? Being next to a university means lots of possible renters, but is the rental market healthy? How about the country-wide real estate downturn? Will the rising costs of housing materials hurt them? Could their prices drop as sub-prime fears depress the market?

Hmm. Lots to consider. And if you’re a serious real estate investor, I’m sure you have many more important questions. But hey, if this is a sound investment, and you want to invest in green AND real estate, here’s a chance to combine the two!

VMware’s IPO

VMware You may have heard: VMware just had their IPO. They’re now listed on the New York Stock Exchange under the symbol VMW.

I’m going long on this company. I like their leadership and the fact that the President and CEO, Diane Greene, is a co-founder with previous CEO experience. She was the CEO of VXtreme, a streaming media technology company that was acquired by Microsoft (MSFT) in 1997.

I also love their products and have actually used their software before. As a front-end engineer trying to build web applications, you have to test your code across a large variety of web browser and operating system combinations. It’s a very tedious task. And it can be very costly if you go out and buy a separate computer for each use case.

Fortunately, VMware’s Desktop Virtualization Products can lower the financial burden considerably. Instead of five machines, you now only need one. Multiple that across an organization of hundreds of front-end engineers and you have mega moolah savings. I heart VMware.

There is a lot of buzz over VMware though, with the media calling it “the hottest tech IPO since Google (GOOG).” It’s easy to fall prey to the buzz and believe all the hype.

So if you’re thinking about buying some VMW yourself, don’t take my word for it. Here are two great articles pro and con their IPO for your enlightenment:

Investment Advice from a Cab Driver

“You know, I’m semi-retired right now,” said the cab driver. “I was able to do that through investing in the stock market.”

“Really?” I asked. “How so?” I decided not to bring up the fact that he was driving a cab.

“I have a degree in Chemistry. I used to work for a dot-com. When the dot-com bombed, I was left with some money. I used that money to begin learning the stock market.”

The car sped down the 101 and darted between slower cars. “I started small,” he continued. “First, I invested only a little. I read a lot of websites and magazines and books. I studied a lot. Everyday. My wife would come home and complain about all the financial reports I had throughout the house. I told her, ‘But this is how I’m making us so much money!'”

I laughed. “So you built up a portfolio through reading all this stuff. Let me guess, you’re a value investor?”

He smiled into the rear-view mirror. “No, not really. I invest in one stock a year.”

“One stock a year? So… you don’t diversify your holdings?”

He shook his head with a grin. “Nope. I spend six months researching and researching. Then, after six months, I select a single stock I want to invest in for that year, then I put all my money into it.”

“Interesting. Sounds risky for the average investor, but since you’re an educated investor…”

“Exactly,” he added. “For six months, I study everything about a particular company. I study the executives, their backgrounds, how many shares they hold. If the CEO holds many shares of that company, that’s a good sign. If he’s selling most of his shares, that’s a bad sign.”

“True true,” I laughed.

“I study the product, the market, it’s competitors, everything. Even if the stock has a sudden spike while I’m researching, I don’t buy it. I only buy it after I’ve completed my research and am very certain that it’s a good buy.”

“You must be a very patient man.”

“Yes, I am very patient. You have to be if you want to be a good investor. I’ve been doing this for thirty years now. I started doing this at a young age. In the twenty years since I started the one-stock-per-year model, I’ve only lost money once.”

“WHAT??”

He nodded with a broad smile. “Just once. I started with penny stocks, since they were very cheap. Even now, I’ll purchase low-priced stocks. Right now, I’m holding about 50,000 shares of a $1 stock. So when it moves up to $2 and $3, well…” he beamed.

“Wow.” I shook my head. “That’s awesome.”

“When I started, I didn’t have this much money, of course. In the beginning, I lost a lot of money. Just like everyone else in the dot-bomb. But every time I lost money, I’d study my decision making analysis to understand why I made this mistake. I’d study the stock more, the company more. I analyzed why the stock lost money. And I used those learnings to improve my investment decisions going forward.”

“And now you’re semi-retired,” I stated.

“Yes. Now I am semi-retired.” We pulled up to my destination. He stopped the car, then turned around. “I tell you, investing is a very important skill. You should learn it. Start small and study your mistakes in the beginning. Do a lot of research and be very patient. Do that, and you’ll be able to retire too.”

I thanked him and got out of the cab. I waved as the cab drove off. Only in Silicon Valley can you met a semi-retired cab driver who makes his money with $1 stocks.

CNBC’s Million Dollar Portfolio Challenge: Results

CNBC It’s been a while since I checked up on my CNBC’s Million Dollar Portfolio Challenge account. And oops, the contest ended a couple of weeks ago. I can’t view my last standing anymore. Bummer.

If I remember correctly, at one point I was at the 2% mark. Not bad. Not good enough to get onto the leaderboard, but not bad.

How did my stocks do, though? Hmmm, let’s take a look. Here are the prices as of last Friday’s close.

Symbol % Gain
AEIS 23.64%
AKAM -9.79%
COG 19.51%
CTSH -11.44%
NTE -4.63%
VCLK 30.67%
YHOO -5.71%
Total 5.20%

Eh, not bad for a few months. It was diversified enough (relatively speaking) to weather the volatility of these growth stocks.

I should note that I changed my strategy halfway through the contest. Instead of keeping this portfolio, I created a total of six accounts, each holding just one of these stocks. The AEIS account is what got me to the 2% mark. VCLK didn’t pop until after the contest. COG also split, giving me some nice gains.

What does this all mean? It means I’m not going to become a day trader any time soon. But 5.20% ain’t bad. At least I beat the banks by a few tenths of a percentage.

Investors and Entrepreneurs on Risk

Homer Simpson Yesterday, I wrote about why most people are more afraid of terrorist bombings than car accidents. It’s because of how the brain (and more specifically, the amygdala and the neocortex) deals with risk.

That got me thinking. How does this effect investors and entrepreneurs, both of whom have to deal with risk in order to be successful?

Investors who can control their emotional responses are most successful, according to John Buckingham’s article in Forbes Magazine, “Warren Buffett: Functional Psychopath?” The article includes the following statement from Warren Buffet’s preface in Benjamin Graham’s The Intelligent Investor:

To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.

“The ability to keep emotions from corroding the framework.” Now there’s an argument for the neocortex if I ever heard one. A paper co-authored by faculty at Stanford University, Carnegie Mellon University and the University of Iowa even showed that “people with [emotionally impaired] brain damage make better financial decisions than normal people” because they’re able to rationally weigh the facts and take calculated risks.

Same goes for entrepreneurs. Taking risks is a major part of entrepreneurship. Rather, taking risks for potential rewards, as Paul Graham writes in his essay, “Inequality and Risk“:

Startups are intrinsically risky. … It seems only about 1 in 10 startups succeeds.

The fact that you’re investing time doesn’t change the relationship between risk and reward. If you’re going to invest your time in something with a small chance of succeeding, you’ll only do it if there is a proportionately large payoff.

Since risk and reward are equivalent, decreasing potential rewards automatically decreases people’s appetite for risk. Startups are intrinsically risky. Without the prospect of rewards proportionate to the risk, founders will not invest their time in a startup.

So if our brains can’t effectively calculate risk, unless we’re brain damaged, how can we expect to invest wisely or be an entrepreneur?

The answer is to raise your emotional intelligence (thereby, presumably, strengthening your neocortex). This may not be possible though, according to John Mayer, one of the authors of the Mayer-Salovey-Caruso Emotional Intelligence Test (MSCEIT), a commercial product that measures emotional intelligence (which is just one out of many other products out there). When asked point-blank, “Can emotional knowledge be improved?“, he answers:

No well-conducted, published studies have been reported in regard to raising emotional intelligence to date. Up to now, however, with a few exceptions, emotional intelligence has behaved much like other intelligences, and it seems very unlikely that it could be easily raised. Still, as very little research exists on the topic, it remains an open question.

That’s not a definite No, however. Goleman suggests understanding your emotions first as a step towards better managing them. He also offers this high-level guidance:

  1. Know your emotions – People who know their feelings are better pilots of their lives.
  2. Manage your emotions – People who are effective in managing their emotions can cope better with life’s adversities and can bounce back faster than those who are poor in managing their feelings.
  3. Motivate yourself – People without emotional intelligence lack self-restraint and would just do whatever their impulses suggest. Emotional self-control, delaying gratification and stifling impulsiveness underlies accomplishment of every sort.
  4. Recognize emotions in others – Emotional self-awareness is the first step to empathic sensitivity. In other words, if we are in touch with our own feelings, then we can empathise with others and sense their needs.
  5. Handle relationships – The art of relating to others includes the skill in managing emotions in others. For example, the ability to calm distressing emotions in others can help resolve many conflicts.

These guidelines sort of fit the studies done on subjective well-being too, which have shown that people who are happier tend to be more successful investors (and entrepreneurs too, perhaps). A higher level of emotional intelligence would seem to lead to a higher level of happiness.

So does a greater control over one’s emotions lead to a greater control over one’s response to risk? All of these reports seem to indicate so, though much of this science is still new. In my opinion, raising one’s emotional intelligence (if possible) is a good thing for any investor or entrepreneur, even if it doesn’t effect one’s perception of risk.

CNBC’s Million Dollar Portfolio Challenge: Kinda Lame

CNBCMany others seem to agree too: CNBC’s Million Dollar Portfolio Challenge is kinda lame. Here’s why:

The contest’s primary audience, I believe, are individual investors who watch CNBC’s investor productions, like Mad Money and Fast Money. They’re probably hoping this contest will strengthen the community behind such shows. However, their contest is not an exact replica of the market. It sets artificial restrictions, which are probably meant to prevent contestants from gaming the system (even though it still happens). These restrictions are (straight from their FAQ):

  • “There are two ways to earn bonus dollars in this contest.” Trivia Questions & Refer-A-Friend.
  • “To be eligible for trading in the Contest, stocks must have a market capitalization of at least Five Hundred Million Dollars ($500,000,000) as of the close of the markets on March 2, 2007.”
  • “Limit orders, open orders, short selling, margin buying, and the trading of derivatives, options, bonds, mutual funds, exchange traded funds or other securities is not permitted.”
  • “Participants can enter trades seven days per week, at any time except during the period each day, if any, when maintenance is being performed on the Site.” (And maintenance seems to occur rather frequently on their site.)
  • “No commissions will be charged for trades.”
  • “Each participant can make a maximum of fifty (50) trades per day.”
  • “Trades submitted on trading days (Monday through Friday, other than market holidays) prior to 3:59:59 p.m. will be priced at the stock’s closing price for such day.”
  • “Dividends, whether stock or cash, will not be processed or reflected in the Contest.”

And probably one of biggest and most influential deviations from reality is how success is measured:

  • “The Participant with the highest percentage gain in his/her total portfolio value during such week will be declared the weekly winner for that week.”

What does this mean?

You don’t have to make the most money, you just have to make the highest percentage gain. According to Jon Markman of MSN Money, this can be done “by simply picking the 10 lowest-priced stocks that the contest allows, with absolutely no other criteria.” Then, according to Project Stocks: “Only buy 1 or 2 stocks at a time. Put a million bucks in 1 stock or put $500,000 in each of 2 stocks.” (Project Stocks also includes more great tips on playing this game.)

After you’ve done that, create a bunch of accounts, a la the Nancy Beamount Controversy. While this was denounced as cheating, CNBC’s official stance is that it’s perfectly acceptable. Says CNBC’s Mark Koba: “I can tell you all that–YES–it is perfectly all right and within the rules to have multiple portfolios, and that no one is breaking the rules by doing so.”

Does this contest speak to their core audience: the individual investors? Though it’s mostly ancedotal evidence, it seems that many individual investors started playing the contest the way I did (trading as if it’s a real market) and aren’t doing well – or at least aren’t up on the leaderboard. Which is probably why many of them are unhappy & complaining right now.

So what am I going to do with my CNBC portfolio? Consolidate all of my money into one or two stocks, then create a bunch of other accounts. This contest isn’t about real investing & trading, it’s just a betting game: Which low-priced stock do you think will increase the most week-over-week, percentage-wise?

P. S. Rats, where did that Refer-A-Friend link go? Anyone know?

CNBC’s Million Dollar Portfolio Challenge: Gaming the System

CNBC Uh oh, looks like someone’s gaming the system. Nancy Beaumont from California is all over the Leaderboard this morning.

Unless she’s discovered the key to cloning or has sisters all over the state (with, um, the same name), Nancy has created multiple accounts with a bunch of different strategies. 800 accounts, apparently. With 800 different stocks (one stock to an account).

Just who is this Nancy Beaumont? I don’t know, but if you make some anagrams of her name, you get:

  • Mean Bunny Coat
  • Anyone but Cam N.
  • Bouncy Tame Ann
  • Bum-acne Antony

Hmmm.