Warren Buffett’s Secret to Making 100% a Year
by Phil - February 26th, 2011 10:51 am
I love the Berkshire Hathaway annual report!
Especially Warren Buffett’s letter to shareholders. The report gives us a great view of the overall economy from a man who has his finger in every pot and his letter to investors gives us a very good insight as to how things are going in the various sectors his operations cover. Most importantly, what I have learned in my own 40 years or reading Mr. Buffett’s reports (my Grandfather was a shareholder) is what should shape any long-term investing strategy: Patience and performance.
I often preach to members the joys of letting gains compound and our $25,000-$100,000 Portfolio, which is currently at $27,531 (up 10%) after 4 weeks, is an exercise in how to quickly compound small gains over the course of a year. Primarily, we try to follow Warren Buffett’s Number One Rule of Investing, which is: Don’t Lose Money. Buffett’s Rule #2 is: See Rule #1 and like us, it’s not that nothing Warren Buffett ever buys loses money – it’s just that he doesn’t ever buy things he isn’t willing to stick with UNTIL they make money. Sure we take a few losses along the road but, by being selective in our entries, we don’t discard stocks that we carefully selected just because the market temporarily disagrees with our valuations.
In our $25,000 Portfolio, it’s only been a month so we’ve only closed our winners so far and they were SPWRA with a 100% gain (these are option trades), INTC with a 40% gain, NFLX with a 42% gain, EDZ with a 75% gain, XLF with a 15% gain, VIX with a 50% gain, USO with a 53% gain and XLE with a 5% gain. In 19 trading day we have made 28 virtual portfolio moves (counting each leg) and, as I said, netted a 10% return to date. Interestingly, we’ve been playing it very cautious as we still have over $18,000 of virtual cash on the sidelines, hoping for a sign to get a little more aggressive next week.
How, you may wonder, are we going to get to $100,000 by December with just $27,531 in February? THAT is the lesson Warren Buffett has to give us and that lesson is COMPOUNDING RETURNS! Since 1965, Berkshire Hathaway has returned an overall gain of 490,409% to it’s shareholders. $10,000 handed to Mr. Buffett…
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Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
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Fiscally Irresponsible Friday – Proles Swallow $858Bn in Debt for $ 613 and Some Magic Beans
by Phil - December 17th, 2010 8:18 am
Good job Congress!
Way to bend of and take it from your new Republican Masters! Not since Jack sold his cow for some magic beans has a deal like this been made by our "leadership" where families earning between $35,000 and $64,000 go $7,800 further into debt to get a $613 tax break while families earning between $5M and $10M get $38,590 and families earning $50M to $100M get $380,590 and families (or Corporations, of course) earning $500M to $1Bn get $3,859,000 or about 12,590 times more than the average middle class family but, then again, they deserve it because – they are that much better than you are!
Face it, unless you are in an income category where your tax benefit has 5 digits, you are what George Orwell (who worked in England’s Ministry of Propaganda) called a "Prole." In "1984" the Proles (proletariat) were the vast majority of the populace, the working class of Oceana. Though the proles are the majority, they are unimportant. The Party explicitly teaches that the Proles are "natural inferiors who must be kept in subjection, like animals". As one of the Party Leaders observes: "the relative freedom of working-class people is merely a symptom of the contempt in which they are held".
It is not only the Party which regards the Proles as unimportant: the arch-enemy, Goldstein, dismisses them too, referring to the divisions of High, Middle and Low people, in which the Low are essentially destined to remain powerless. This attitude has much in common with the one Huxley shows in Brave New World—the lower castes are mindless enough to be satisfied with little, and can be relied on not to be troublesome.
You’re not going to be any trouble are you? Enjoy your $613, little people. That’s what, about a month’s worth of gasoline and cable TV? Congratulations on your voting acumen – you certainly have gotten the Government that you deserve! I apologize because I had mischaracterized the tax cuts as being fairer to the Middle Class last week, when I said it was only an outrage. I thought that families earning $50,000 would be getting $900, not $613, but it turns out that 12,590 times $287 is another $3,613,330 that could be given to a Billionaire and they NEED that money to buy stuff that might create a job while you would only…
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Bull Eyes New Highs in United Continental Shares by Year’s End
by Andrew Wilkinson - November 17th, 2010 4:00 pm
Today’s tickers: UAL, KSS, ANN, KO, SINA, XLF, FRX & OI
UAL - United Continental Holdings, Inc. – The world’s largest carrier jumped up on our ‘most active by options volume’ market scanner earlier today after one bullish options player purchased a large call spread in the December contract. Shares in United Continental rose 0.90% this afternoon to trade at $27.42 as of 3:00 pm. The investor purchased approximately 11,200 calls at the December $29 strike for a premium of $0.72 each, and sold the same number of calls at the higher December $31 strike at a premium of $0.32 each. Paying a net $0.40 per contract for the spread, the investor is prepared to profit should shares in UAL surge 7.2% over the current price of $27.42 to surpass the effective breakeven point to the upside at $29.40 by expiration day. The trader is poised to accumulate maximum potential profits of $1.60 per contract, roughly $1.792 million, if the airline operator’s shares jump 13.05% and trade above $31.00 by expiration in December.
KSS - Kohl’s Corp. – Massive prints in Kohl’s Corp. call and put options caught our eye this afternoon. Shares of the department store operator that sells nationally recognized as well as privately branded goods increased as much as 4.165% in the second half of the session to touch an intraday high of $52.76. It looks like the investor responsible for the mammoth transaction sold 50,000 puts at the December $50 strike for a premium of $0.85 each, and purchased the same number of calls up at the December $57.5 strike at a premium of $0.30 apiece. The risk reversal was tied to the sale of 2.15 million shares of the underlying stock at a price of $52.12 on a 0.43 delta. The investor receives a net credit…
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Pop Culture – My Interview with Coke CEO Muhtar Kent
by Phil - October 20th, 2010 8:33 pm
Coca-Cola has always been one of my favorite companies.
They are the perennial safety play, a reliable grower that pays a 2.9% dividend and was one of the first companies we snapped up when the World went on sale in the ’08-’09 crash. Our faith in the company was well justified in the recent earnings report. Despite weak North American sales growth (2%) and flat growth in Europe, International sales grew at a tremendous clip with 11% volume increases in the Pacific and 12% increases in Eurasia/Africa. Best of all, those growth rates are "currency neutral net revenues" – so we are comparing apples to apples here – unlike many other companies who report their earnings in declining dollars.
On the last day of the quarter, the company closed their transaction for CCE’s North American business, an acquisition that will poise the company for further growth in the years ahead. What struck me the most about the report was the way Coca-Cola looks at the World. Coke doesn’t divide the World into North or South or East and West, Coke sees two kinds of countries – the ones with PER CAPITA consumption of more than 150 eight-ounce servings of Coke-brand products per year and the ones that they need to work harder in.
Also impressive is the company’s plan to repurchase $2Bn of their stock back BY THE END OF 2010. This will be fairly easy for the company to do as cash from operations has already increased 15% in the first 3 quarters of the year. Since we already know and love KO and, since we already know how to read an earnings release, I decided not to squander my time talking to Mr. Kent about clarifying product revenue steams in Guiana – that’s what conference calls are for!
Muhtar Kent is a man as impressive as the Company he runs. He’s about 10 years older than me, born in 1952 in New York City and his father was the Turkish Consul-General. Kent went to High School in Turkey, college in England with a masters in business from City University in London. He served in the Turkish military, came back to America with no money and answered a want ad for a job at the Coca-Cola Company, where he was (after gaining a quarter century of experience) appointed CEO in July of…
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Which Way Wednesday – Can We Ignore and Soar?
by Phil - October 20th, 2010 8:35 am
Wheeeee, this is fun!
Industrial Production was DOWN 0.2% vs up 0.2% expected. This 200% miss was led by a 1.9% drop in utilities as consumers simply can’t afford to keep the lights on anymore, even with very low natural gas prices keeping costs down. The only segment that was up was – you guessed it – MINING, as top 10% speculators hoarding shiny bits of metal in anticipation of the collapse of civilization drove production up 0.7%, marking 3 consecutive months of increasing activity.
Housing Starts dropped 10% in September and Permits for future starts dropped another 4% and this morning we got word that Mortgage Applications fell 10.5% last week as the price of a 30-year fixed mortgage went from 4.21% to an unaffordable (I guess) 4.34%. Imagine prospective buyers sitting at a table saying to the broker: "4.34%? Why that’s outrageous, we won’t pay it!" Inflation (real inflation) is 3.5% and you are paying 4.34% so that is a net effective 0.84% interest rate on a home AND STILL NO TAKERS! As we noted last week, 34% of Americans think their homes will go down in value next year.
That’s just silly – home prices are ALREADY down in value by 12% this year. Your home is, unfortunately, priced in dollars so the "stable" prices this year are only stable when priced in a currency that’s collapsing. To Japanese or European buyers, your home value is swirling down the toilet just as fast as it was during the first two years of the collapse.
It’s kind of like when the coyote is standing on a rock that has broken off from the cliff and doesn’t realize he’s falling with the rock – these illusions work just fine until you both splatter into the ground…
What then, is the point of giving us the illusion of economic health by debasing our currency faster than the economy is falling? Clearly we are not fooling the consumers – consumer confidence is in the toilet because a vast majority of consumers live in the real World which is currently located between a rock and a hard place for 90% of Americans. Oh, by the way, don’t forget that those polls where 60% of the people say the economy sucks include the top 10%, who think the economy is great – so great, in fact, that…
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Weekend Reading – Oil’s Not Well
by Phil - October 17th, 2010 4:51 pm
Wow, we covered a lot of stuff in Member Chat this weekend.
After a really fun Friday where we had another couple of massive index puts pay off in the morning and on Saturday we reviewed our October’s Overbought 8 list, with half our trade ideas already past our 50% targets and 3 of the 4 remaining spreads on track. In Member Chat, we discussed the possibility of a pullback in oil next week as the barrel count on the NYMEX is dangerously high with over 600M barrels currently scheduled to deliver to Cushing in the next 90 days. Cushing has a capacity of about 40M barrels a month and they are full but, even if they weren’t, 480M barrels need to be dumped and rolled into Feb, March and April contracts between now and the year’s end.
The November contracts settle on Wednesday, the 20th and any traders caught holding those "hot potato" contracts have to figure out what they will actually do with millions of barrels of oil. Right now, there are 141M barrels earmarked for November delivery and, if this month is typical, only about 20M are actually needed. 141,000 contracts (1,000 barrels each) were traded 210,000 times on Friday as prices fell from $84.12 at 3am (Asia trading) to $80.75 into the NYMEX close. It is easier for a NYMEX trader to drink a barrel of oil than fob off his contracts to some other sucker during a glut – or something like that is the old biblical saying…
What I love about investors and the MSM in this country is their ability to completely ignore the fact that, ultimately, someone must consume the oil that is leading the inflationary drive in the economy. Actually, we shouldn’t blame oil (I said as much last week) but, as I also said last week, QE is the wrong kind of inflation because we are not giving any money to the workers. Ultimately, it’s the workers who have to buy food and fuel you know….
One thing people don’t realize from a global perspective is that gasoline prices are subsidized for India and China to the tune of nearly $40 per barrel so China’s 11Mbd of fuel subsidies is bleeding Beijing by $13Bn a month and that goes up $3Bn a month for every $10 increase in…
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Call Spreader Targets Ancestry.com, Inc. as Shares Soar to All-Time High
by Andrew Wilkinson - September 20th, 2010 4:48 pm
Today’s tickers: ACOM, DLB, S, FSIN, XLF, PDE, MED, KO & THC
ACOM – Ancestry.com, Inc. – Shares of the online family history resource surged 8.380% in afternoon trading to reach an all-time high of $22.76. The rally in Ancestry’s shares inspired one bullish options investor to purchase a plain-vanilla call spread in the February 2011 contract. It looks like the trader picked up 1,050 now in-the-money calls at the February 2011 $22.5 strike for an average premium of $2.82 each, and sold the same number of calls at the higher February 2011 $30 strike at an average premium of $0.55 a-pop. Net premium paid to establish the bullish spread amounts to $2.27 per contract. Thus, the trader is poised to profit should ACOM’s shares jump 8.8% over today’s high of $22.76 to surpass the average breakeven price of $24.77 by expiration day in February. Maximum potential profits of $5.23 per contract are available to the call-spreader if ACOM’s shares rally 31.8% to exceed $30.00 by February expiration.
DLB – Dolby Laboratories, Inc. – A short strangle on the provider of products and technologies created to enhance various aspects of entertainment media indicates one options investor expects Dolby’s shares to trade within a specified range through expiration in March 2011. Shares surged 6.3% to reach an intraday high of $59.46 by 2:30 pm ET after the stock was upgraded to ‘market outperform’ from ‘market perform’ with a 12-month target share price of $69.00 at Avondale Partners LLC. It looks like the strangle-seller sold roughly 3,000 puts at the March 2011 $50 strike at a premium of $2.46 each, and shed about the same number of calls at the higher March 2011 $65 strike for a premium of $2.80 apiece. Gross premium pocketed on the transaction amounts to $5.26 per contract. The investor responsible for the trade keeps the full premium received as long as Dolby’s shares trade within the boundaries of the strike prices described through expiration day next year. The premium received acts as a limited buffer against losses in the event that, at expiration, shares fail to trade within the specified price range. However, losses start to accumulate if DLB’s shares rally above the upper breakeven price of $70.26, or if shares nosedive to trade below the lower breakeven point at $44.74, ahead of expiration day in March. The increase in demand for options on the stock coupled…
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Thursday Thoughts – GDP Up, Jobs Down
by Phil - July 29th, 2010 7:55 am
Forget the GDP.
We’ll get the report on Q2 GDP at 8:30 tomorrow but I’ll be watching the Employment Cost Index to see if we are recovering. I know it seems like "commie talk" to my Conservative friends, but rising wages and benefits are signs of a healthy economy and you can plot the rise and fall of the stock market very neatly against how well the workers are treated.
It was Henry Ford who first "discovered" that, if you expect American consumers to buy your products, you have to pay American workers enough to afford them. In January of 1914, the Ford Motor Company announced they would pay $5 a day to its workers. The pay increase would also be accompanied by a shorter workday (from nine to eight hours). While this rate didn’t automatically apply to every worker, it more than doubled the average autoworker’s wage. Workers came from all over the nation and all over the world to work for Ford, who had their pick of the best and the brightest, which led to a 60-year legacy of dominance in American Industry.
Henry Ford had reasoned that since it was possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class and that led to a massive economic boom in "the Roaring 20′s" until greedy Banksters and speculators crashed the market in 1929.
Unfortunately, earning $5 a day is still a dream for much of the workforce employed by US corporations as that is more money than is paid to their tens of millions of employees and suppliers in China, India, Vietnam, South Korea, Taiwan, Indonesia, etc. Not only have American corporations "unlearned" the lessons that made this country great but they are actively involved in tearing down what is left of the American Middle Class by undermining their ability to earn and save as they ship jobs out of the country and cut wages and benefits for those few workers (135M at last count) who are left.
8:30 Update: Make that 134,543,000 workers left - as we lost another 457,000 American jobs last week. Continuing Claims picked back up to 4.56M, also more than expected but, as I said to Members yesterday, so what? We are investing in Corporate Pirates, not the victims they slaughter so when we see…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(