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Just One Thing

I just finished John Mauldin’s new book, Just One Thing. It took me only two days to read. I cannot enthusiastically recommend this book even thought there are some nuggets of wisdom in it. In the book, twelve investment writers each give their one best investment idea.

Some of the authors rambled and others (Bill Bonner, George Gilder, John Mauldin) did not have anything useful to say that you could not have already picked up from reading Mauldin’s email newsletter or other sources. For those who are not familiar with Dennis Gartman, James Montier, Gary Shilling, and Richard Russell, their chapters make good reading.

The two best chapters were Ed Easterling’s chapter on the capital asset pricing model (CAPM) and its faults and Rob Arnott’s chapter on non-market-weighted index investing. Easterling does a good job of explaining problems with how we look at risk. Arnott makes a good case for avoiding index investing in market-weighted indexes such as the S&P 500. In a market-weighted index, companies that are selling above their true value will be overweighted while companies that are selling below their true value will be under-weighted.

The solution is to invest equal amounts in all different companies. By investing equal amounts in the stocks in the S&P 500, you can average a return of 2% more per year over the market-cap weighted S&P 500. Of course, that is what investors in individual stocks should do. By putting the same amount of money into each stock, regardless of market-cap or price, investors lower their risk while increasing our returns.

Overall, Just One Thing is a decent book and a quick read. Consider buying it.

Disclosure: This review was originally written two years ago and published elsewhere.

Comcast to Shareholders: Screw You!

Comcast [[cmcsa]] has agreed to pay its founder a salary for a full five years after he has ________. The logical (and upsetting) conclusion of that sentence is “retired”. No public company or even private company with minority shareholders should ever pay an executive who is retired or otherwise not contributing. However, Comcast has decided to take callous disregard of shareholders to a whole new level by agreeing to pay its founder for five years after he has died. He will even be paid a bonus in that time. Ouch.

Disclosure: I have no position in CMCSA, nor am I a customer. I have a disclosure policy that shall never die!

Echostar’s $63 million dollar mistake

Oops. Echostar [[dish]] lost $63 million more over the last few years because they included the same income in multiple years. A new SEC reg requires companies to disclose financial errors that are not material but through repetition have become material in aggregate. Sadly, companies do not have to run this through the earnings statement and can take it straight to the balance sheet. Unsophisticated investors may never even notice. See the original article by David Milstead over at the Rocky Mountain News. I recommend subscribing to his column via RSS.

Disclosure: I have no position in DISH; I am a customer. I have a disclosure policy.

Tracking your finances in Quicken or Money

If you do not use Intuit Quicken or Microsoft Money (or a similar program) to track your finances, you should start. I take about 30 minutes each week to update my bank accounts, as well as 5 minutes each trading day to update my brokerage accounts. If you just hold index funds and ETFs or long-term investments in individual stock you would not have to update your transactions very often, maybe only once a month.

Most credit cards offer downloading into Quicken. I like using my Discover card because it will download the most easily into Quicken. Most other cards (such as those by Chase) require a visit to the website to download transactions.

A number of brokerages offer automatic downloading into Quicken of transactions, including E*trade, Scottrade, and Ameritrade. My main broker, Interactive Brokers, requires a visit to its website to download trades to Quicken. Of course, buy-and-hold investors should not use IB; the only reason I use it is because it has a good platform for short selling.

A few hints:

  • Track depreciation of assets such as cars. I track all my large assets in Quicken. Each year I have depreciated my car, a 2003 Mazda Protege, using a straight-line 8-year depreciation schedule. This tracks the real loss of value of the car.
  • Use mark-to-market accounting. I own a rental property, a house, and a chunk of land. I anticipate selling the rental property sooner rather than later and have reduced its value in Quicken by the 6% commission I will likely pay. I have also reduced its value by an extra $10,000 in market-value losses I have suffered. I have likewise reduced the value of my house by about $30,000 in market value that it has lost since I bought in 2003. I have increased the value of the land by a couple percent a year. I am still carrying it at a price below what I could get by selling it.
  • Capitalize home improvements. Home improvements (not repairs) increase the value of your home. Capitalize them by transferring the money you pay (in the program) to the asset account of your house. Do not do this for improvements that will not increase the value of the house.
  • Track your net worth. This can be a good motivator. My financial goal is to grow my net worth by over 10% per year. For those with significant debt, seeing a large negative net worth can be a good incentive to save.

Doing all the above lets me track my net worth very closely so that I can see if I am making progress towards my financial goals. If you wish to improve your financial performance it pays to track it. Tracking your finances closely will help you know how you are doing and it will motivate you to do better.

Penny Stock Touting Stays in the Family

I came across the following information when investigating my favorite penny stock, Continental Fuels (OTC BB: CFUL). Continental Fuels hired Crosscheck Capital 7 months ago to pump up its stock. It appears that Crosscheck Capital is associated with George Mahfouz Jr., who was previously fined $230,000 by the SEC back in 2000.

I should note that George Mahfouz Jr. is not listed as a member of Crosscheck Capital, but a trust with the name Mahfouz and a Paula Mahfouz are listed as members. Furthermore, there is a Paula Mahfouz who is a member of Crosscheck and who is related to George Mahfouz Jr. (probably his wife, although I am not sure). How do I know she is related? On a shareholder list of Pantheon Technologies back in 2000, the two are listed as shareholders and have the same address (search the 10sb12g form for ‘Paula Mahfouz’ to find this). Considering how few Mahfouz there are in Arizona (23 total according to phone records), and considering the base rate probability of <.001% of any one person being a penny stock promoter, I can conclude beyond a reasonable doubt (but not with certainty) that the Paula Mahfouz of Crosscheck is related to George Mahfouz Jr. and therefore that George Mahfouz Jr. is thus associated (if not directly involved with) Crosscheck Capital.

I should also mention that if Mr. Mahfouz has been actively involved with Crosscheck Capital from its inception in 2004, then he violated his agreement with the SEC that prohibited him from touting microcaps for five years after September 2000. If he has not been actively involved with the business then he has has not violated his agreement or any law. That being said, sending out fliers to hundreds of thousands of unsophisticated investors touting worthless companies and only disclosing a conflict of interest in the fine print is immoral, even though it is legal.

Disclosure: I hate stock pumpers, whether their activities are legal or illegal. I would also like to express my displeasure with the Arizona state agency that deals with businesses: they had no record of Mr. Mahfouz’s previous business, despite an SEC litigation release that stated it was an LLC formed in Arizona. I have no position in CFUL.

Updated disclosures and disclaimers

Please see the updated disclosures and disclaimers. I now allow myself to trade any time if the trading is non-discretionary–whether across the board tax selling (as I was forced to do earlier today earlier today, selling every stock or ETF I owned that had a loss) or trades motivated by margin calls or Reg SHO calls (as happened to me earlier today as well).

2007 Best & Worst

First, the list of shame:

Worst CEO: RICHARD A. ALTOMARE of Universal Express. See the SEC litigation brief for an explanation of his stock fraud. The best part about this story is that his company took out a full-page ad in the New York Times to criticize “naked short sellers” and other critics. Now that the company is in receivership it looks like the Times won’t get end up getting paid for the ad.

Most Blatantly Overvalued Company: Continental Fuels (OTC BB: CFUL) wins this award. This small distillate distributor at one point had a fully-diluted market cap of $1.5 billion. It continues to trade at 40x my fair value estimate of $0.01 per share.

Most Hypocritical: Jim Cramer, for prattling on about various stocks and infecting people with the stock bug. Following his advice would incur huge trading fees and underperform the market. In his new book he advises investors to use index funds. I guess that advice doesn’t sell well on CNBC.

Dumbest Policy: The NYSE wins this hands down for their insane policy of requiring $2.50 in cash per share to short sell cheap stocks. This effectively prevents short sellers from short selling most penny stocks and makes it easier for pump-and-dump schemes to drive up the price of penny stock shares.

Now, the good list:

Best CEO: Joseph Sorge, formerly of Stratgene. He agreed to sell the company in April to Agilent [[a]] so that he could pursue other opportunities (seriously). The buyout price was at a nice premium to the stock’s price and was almost twice the stock’s 52-week low (near which I had bought). Besides just selling out, Sorge ran Stratagene well and kept investors well-informed. The company was and is highly-regarded for great products and knowledgeable sales people. Congratulations Joseph for being a great scientist and CEO.

Best Investment: Diversified low-cost index funds win! I will continue to say that they win each year until the day I die. I currently have most of my money in index ETFs including DEM, VTI, RZV, DGS, EFV, VWO, IVE, and IJS.

Best Financial Writer: David Baines of the Vancouver BC Sun. He has exposed numerous penny stock scams. He has earned the nickname “****ing piece of ****” from the former CEO of one of the companies he targeted. To misquote someone, while he may be a “****ing piece of ****”, he is OUR “****ing piece of ****”. Thanks David for putting some heat on the scammers and the ‘regulators’ that disgrace our continent.

Best New Investing Blog: Goodevalue.com, obviously.

Best New Investing Blog not written by me: Sequence Inc. Fraud Files, written by forensic accountant Tracy Coenen. While Tracy loses points for being a Packers fan, she gains them back for having red hair. I love her so much that she wins this award despite blogging for just over two years [corrected; I had previously said one year], stretching my definition of new almost to the breaking point. But her blog is new to me, and that is what counts.

Best Short Seller: Hats off to William Ackman of Pershing Square Capital. His bearish call on the bond insurers has been great so far. The carnage in that sector is already worse than almost anyone else imagined and it could get much worse.

Disclosure: I have no interest in any stock mentioned. I own all the ETFs mentioned. I have a strict disclosure policy.

When nobody knows how many shares are outstanding

Perhaps one of the most important pieces of information that an investor needs to decide whether a company is fairly valued or not is the number of shares outstanding, particularly the number of fully diluted shares outstanding. With that and the stock price an investor can calculate the market cap of the company and use earnings and book value figures to calculate valuation ratios or run a DCF analyis.

I just ran across one company that evidently does not think that is important information. Cytocore (OTC BB: CYOE) is not unlike many of the other companies that arouse my ire. It is an OTC-traded microcap with little in the way of book value or revenues. I came across it while searching for more companies to short sell (a favorite hobby of mine). What struck me about Cytocore is that the company has not published figures anywhere that reveal the number of shares outstanding and thus the company’s market cap.

Cytocore (which has the least informative website I have ever seen) had 353 million shares outstanding as of its last 10Q, filed on November 12, 2007. The company also had a proxy statement announcing a meeting of stockholders on November 19, 2007 to vote on whether or not to effect a reverse stock split. The proxy did not have an exact proportion for the split, rather it was a range of “not less than one-for-five and not more than one-for-ten”. Since then the company has not announced in any SEC filing the exact proportion of the reverse stock split and the resulting number of shares outstanding or even if the resolution passed. Depending upon what happened, the company could have a market cap of anywhere from $100 million to $1 billion.

While the question of whether to invest is easily answered–the company is overvalued at any market cap–the question of why this company would fail to disclose something so important is difficult to answer. It appears that the company put out a press release, but it never filed an 8k to document the press release (as appears to be required by law). By the way, Cytocore effected a 1 for 10 reverse stock split (as shown in the above-linked press release fragment).

Forbes Informer put out an article that lambasted Cytocore almost a year ago. Unsurprisingly, Cytocore’s ‘investors’ have underperformed the market by 55% since then.

Disclosure: I have no position in CYOE. I have a disclosure policy.