14 Oct2008

As the stock markets plunged last Thursday around the globe, there was this incredible pall over anyone who had a smidgen or more of common shares/stocks. I could hear the snickers of some readers who recently felt my comments on “renting vs. owning a home” gloating that being invested in house, apartment or land was indeed better and this incredible storm hitting equity markets was their proof positive of financial instruments vs. land and buildings. Well, I am glad to say, we haven’t held stocks of any significance (less than 1% of total porfolio) for more than 18+ months, and the recent drop in the stock markets hit us only peripherally, in that bonds and other financial instruments took a relatively sympathetic beating. But there are a few points about the current crisis I would like to point out:

1. The base cause of the current credit crisis? Tens or hundreds of thousands of folks (mostly in America in this case) that borrowed “cheap money” against the rising values of their homes and who spent that money on unproductive items. In other words, profligate spending. And using mortgages and credit card borrowings to finance it. Basic, irresponsible personal financial behavior. Spending more than they could afford. Collectively, they made up the crux of the problem. And as they could no longer pay off their debts, and home prices came crashing down, they collectively formed the underlying reason for the current credit crisis…

2. Also to blame, were the banks and investment banks that encouraged this type of spending and lending. Who developed the products and marketed them. Who made money and capital so freely available to folks who weren’t using it effectively. And yes, it two took to tango. The folks borrowing the funds and the ones who just kept supplying it, while paying themselves incredible salaries and bonuses as profits seemed to skyrocket to the heavens.

3. The press is being a bit histrionic about the events, in my opinion. “The End to Capitalism” some suggest, the 1929 Stock Crash followed by the “Great Depression on the Horizon ,” say others. Worse, photos on front pages of people making motions to slit their throats and shoot themselves. If anything, such press coverage has heightened the fear and caused some of the panic. And made the volatile swings of the market even more acute.

So what is the point of this post? At the height of the plunge last week in New York, on Friday evening, Manila time, I took a wild guess that matters had possibly bottomed out, and I took the incredible opportunity to educate The Teen about the stock markets. She had been asking about them for a couple of years and I had promised her that we would “play a game” with the intent of teaching her some of the basics of investing in company stocks. So while everyone was freaking out about the decline of their portfolios, we decided it was time to buy. At 7-8pm last Friday Manila time, or just before the New York markets opened, we gathered in our den and picked out 10 stocks that we would “buy” in a “hypothetical” portfolio (5 for MM, 5 for Mrs. MM and The Teen) and we would track over the next couple of years so that The Teen could see how this works. We would buy $20,000 worth of each stock for a total of $200,000 invested in the stock market. Boy, do I regret keeping this activity hypothetical…

First, we went through the basics of a stock, then I picked five stocks and “purchased” them either at their closing price on Thursday NY time or during the morning plunge on Friday, New York time… these were my stock picks and common person’s rationale for each:

1. Apple Computers – I use an Apple laptop and desktop, I have an ipod, an itouch and we buy music from Apple. Purchased 227 shares at $88 each for $20,000.
2. Coca Cola – I drink Diet Coke like water, and I think stressed folks all around the planet who can’t afford starbucks will settle for a Coke. Purchased 555 shares at $36 each for $20,000.
3. Goldman Sachs – A firm I would have given a minor body part to join when I graduated from Business school and while I made final round interviews, they didn’t make me an offer. I think Warren Buffet buying into them is as good a sign as any that I should too. Purchased 222 shares at $90 each for $20,000.
4. Boeing – Seems like a dumb idea to buy a plane manufacturing company when world travel could slow dramatically… but I love 747’s and think they were one of last centuries greatest inventions and there aren’t many airplane companies left, so this is an investment in MANUFACTURED goods. Bought 476 shares at $42 for $20,000.
5. CVS Drugstores – Drugs, need I say more? Bought 658 shares at $30.40 for $20,000.

After some discussion, Mrs. MM and The Teen picked:

1. General Electric – For all the appliances and other good things they bring to life. :) Bought 1,052 shares at $19 for $20,000.
2. PLDT – Listed in NY but based on Philippine telecommunications revenues. Bought 416 shares at $48 for $20,000.
3. Amazon – The Teen reasoned that with hard times, more would order stuff on-line rather than drive to the mall… Bought 357 shares at $56 for $20,000.
4. Hershey’s – Chocolate, need I say more? Bought 574 shares at $34.85 for $20,000
5. Microsoft – Another technology pick, as Mrs. MM is still on a PC. Bought 909 shares at $22 for $20,000.

I post this so that we can all follow the progress of this stock portfolio together. Updates every few weeks or every month, depending on volatility. I will do a follow up post to this later, however, as Friday appears to have been indeed a bottom from which we have bounced nicely for now…

 

COMMENTS:

  1. chinachix says:

    “Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders “, a book by James Scurlock does a great job of researching and writing about your point #2.

    re your post on renting vs. owning, a friend of mine (incidentally, ex Goldman Sachs) actually posited this argument to me many many years ago. i remember being amazed by the concept then, and was pleasantly surprised to see your post about it. a case of great minds thinking alike…?

    Oct 14, 2008 | 9:53 am

     
  2. Thel says:

    Speaking of stocks, in 1996 I bought Warren Buffett’s 32 shares of brk.b stocks for $46K. By December 08, it went up to around $160K. Tonight, they are worth around $126K. I’m very happy I’m still ahead of $80K.

    Oct 14, 2008 | 10:04 am

     
  3. sister says:

    Market’s way up today. Seems like my boat is stuck in the mud, it never rose when the tide was high and still is mired when the market is down… and neither do I own my home. My landlord is just waiting for me to be carried out the door.

    Oct 14, 2008 | 10:12 am

     
  4. AleXena says:

    Although I only have a vague understanding of the financial market form my collegiate training, I agree with your outlook Market Man.=) I have read over and over again in various newspaper and internet articles that now is the time to buy stocks as the purchase price is at its lowest. Of course diversity in portfolio and a long-term view on investments, they say, will help ease out uncertainties. It is still a risky environment.

    This kind of discussion prompts me to really take a short course in learning the ways of financial markets in the world.=) By the way MarketMan, in spite of the “worsening” global economy, I am still one of your “converts” in investing in portfolios as oppose to buying a house.=) Thanks for helping us get educated.

    Oct 14, 2008 | 10:23 am

     
  5. terrey says:

    i will be following this post since i dont know how stock market works. my thai ofcmates (like most khun thais i know)are into it day and night.

    Oct 14, 2008 | 10:34 am

     
  6. wysgal says:

    You guys seem a little bit heavily weighted on tech … in any case it’s cute how you relate your stock picks to your personal experiences with the brands. The market is bottoming out, tis the best time to buy!

    On a side note, my mother has told me she hasn’t checked the state of her portfolio in recent weeks, rationalizing that worrying about things won’t change anything (there are other folks managing it anyway). And my father has philosophically asked that if a tree falls in the middle of a forest and no one is around to hear/see it, has it really fallen? Ergo, unchecked portfolios remain in limbo until the day you actually take a good look at them again. =)

    Oct 14, 2008 | 10:48 am

     
  7. Jun says:

    Thanks to the greedy CEOs, banker, finance people who’s aim in life is to get more bonus so that they can buy nice cars, house, etc….Hope this melt down will help them to re-look at their priorities in life.

    For us who are satisfy with reading MM posting, trying out his recipes and learn to appreciate simple things in life. Economic crisis will not change our outlook in life.

    Oct 14, 2008 | 11:06 am

     
  8. natie says:

    yey!! the market ”went up” today..

    Oct 14, 2008 | 11:10 am

     
  9. Mari says:

    I am glad to see this post. I was actually going to suggest that you come up with more financial matters since your rent vs owning a house post. After all you are qualified to give advise. It is still apropos to the contents your site. You will still be discussing the market, the financial market. Maybe a separate financial category is in the horizon?

    Blessings to you!

    Oct 14, 2008 | 12:14 pm

     
  10. RobKSA says:

    Being a former GE employee I also bought 300 shares of GE last Friday at 19 (and yes we own GE refs and ride on planes with GE turbines, and see a lot of hospital equipment made by GE):). It went up but is down Monday I think basically because there’s a lot of other opportunities for day traders on Monday. I also bought 300 shares of PRAA (Portfolio Recovery Associates) which provides debt collection for companies and the government at around 31 dollars. PRAA is a favorite of stock shorters but I like it and I think it is a good buy because of what’s going on (debts).

    Oct 14, 2008 | 12:37 pm

     
  11. chad says:

    Wow MM, the Teen sure is lucky there is someone who can teach her about stocks. I’D give a minor body part to have someone teach me :). Ive attempted to educate myself about it but my head starts to swirl a little. But a firm resolution: I don’t own credit cards. Jsut thinking about debt gives me the heebie jeebies. Youre the second person where I heard that renting vs owning argument; the first was my aunt. It didn’t really register at first (since I knew from childhood that owning a home is the bastion of security) but the idea is slowly seeping.
    Again with stocks,May I know how you track your (hypothetical) numbers? I remember there was this website that does just that (hypothetical tracking) do you use it? (I cant remember now what it was though). Nice break from the food posts MM, appreciate it.

    Oct 14, 2008 | 12:40 pm

     
  12. Katrina says:

    The Teen’s fortunate to have an expert like you around to teach her how these things work. I’ve never taken a single business or finance class, and while that didn’t used to bother me at all, these days I can’t help but think that I should’ve. But whenever I try to understand these matters, my brain goes into color-bars mode (now there’s a reference younger people won’t get).

    On TV recently, I saw how Germans aren’t as affected by the crisis, partly because most of them rent, not own their homes. (Makes me wonder, though, WHO owns all the houses they’re renting?) Also, they hardly have debts. Nevertheless, F is determined that we should buy a house one day — not so much as an investment, but just ’cause he’s always dreamed of it — as, I think, most Filipinos do (which is why your theory won’t fly here). It has to do with the security of *owning* something, and the knowledge that it can’t just be taken away. Societal pressure is also at play: when one’s peers all start buying their own homes, one can’t help but envy them. Personally, though, I like things that are practical and cause less stress, so I’m trying to resist buying property.

    Thanks for this finance post, MM! I look forward to more. :-)

    Oct 14, 2008 | 1:37 pm

     
  13. Lady Who Lounges says:

    i know next to nothing about such matters, which is why i invested in “idiot-proof” funds. unfortunately, these funds were not crisis-proof. i’m just following my dad’s advice to wait it out (since they were supposed to be long-term investments anyway). i guess there’s still nothing like making money the traditional way, which is by actually working!
    funny, when i was reading about all these superstar investment firms in fortune magazine last year (one of the few times i tried to), i remember thinking, “i wonder how long this will last before it all starts tumbling down.” i barely understand any of it, and yet the eventual rise and fall of anything we know in this world is pretty much an accepted fact of life…

    Oct 14, 2008 | 1:47 pm

     
  14. Lady Who Lounges says:

    pahabol: i noticed that all the stocks you bought are pretty much things that people will keep needing or wanting—chocolate, coke (for the die hard addicts), books, electrical appliances, airplanes (no one can live without air travel these days), computers, and telecommunications services. i think you guys will do okay, and even if you don’t, anyone with $200k to play with can’t be in too much trouble, whatever the stockmarket brings :)

    Oct 14, 2008 | 1:55 pm

     
  15. Naz says:

    KID is fortunate KID. Investing in stocks is still a good thing to do as long as it is diversified and it is for the long haul. Live within your means, pay off all debts and save at least one third of your income. I don’t rent but my mortgage is low; lower than some people’s car payment. My property will be passed on to my only KID.

    Thanks for the diversified topic, MM.

    Oct 14, 2008 | 1:58 pm

     
  16. Naz says:

    KID is very fortunate indeed. (Sorry, I deleted the wrong words)

    Oct 14, 2008 | 2:01 pm

     
  17. Katrina says:

    By the way, I read recently how Apple’s stocks dropped because of rumors about Steve Jobs retiring, which goes to show how much of that company’s future is perceived to be inextricably linked to him. Since Bill Gates has retired, Jobs could do so soon, too. Wonder how Apple will do then?

    Oct 14, 2008 | 2:24 pm

     
  18. Edwin D. says:

    Placed all of my equity shares into bonds and savings last February after looking at my portfolio lose money. Haven’t made much money for my 401K by placing them in savings and bonds but at least I wasn’t losing any money. Word of advice to investors, it is your money and do what your guts tell you. Investors who are in for the greed should not be in this game. It is retirement money for god sake and college tuition for little junior or princess. Take control of your investment adn tell these brokers what you want and not letting them tell you what to do.

    Oct 14, 2008 | 2:58 pm

     
  19. Socky says:

    Katrina,

    When Steve Jobs retires, Apple will drop; when Bill Gates retires, that’s day One of Microsoft rennaissance. He he.

    Where will I put my money? The company with an ingrained culture of creativity: apple.

    Oct 14, 2008 | 3:10 pm

     
  20. Sidney says:

    What goes up… goes down… ;-)
    And never put all your eggs in the same basket… but as a market man you know that… ;-)

    I would be careful with Apple Computers… Steve Jobs is seriously ill… and once he is gone… forget about innovation and design.

    Oct 14, 2008 | 4:50 pm

     
  21. Marketman says:

    Sidney and others, while I agree Steve Jobs is brilliant, I think Apple as a company can definitely survive and thrive without him, but that is just my personal opinion. After all, places like Bell Labs after Alexander Graham Bell, did just fine in the century afterwards… Edwin, you are right to some degree, take control and responsibility for your own investments… but for others, seeking professional help and mutual funds is practical… Katrina, owning one property for reasons other than purely financial ones raises the emotional returns and it is completely understandable… so go for it if that is what makes F and you happy! Chad, you can just look up prices of individual stocks, or if you try google finance, they can track a hypothetical or real portfolio for you automatically… Wysgal, ignoring troughs is a new one for me, but I can see why it works… :) Thel, Berkshire Hathaway was a good pick if you ask me… your compound return for 11.5 years is roughly 9% per annum… not too shabby! It would have been closer to 11-12% compound annual as of Dec last year! Chinachix, will have to get a copy of that book to read! Thanks!

    Oct 14, 2008 | 5:41 pm

     
  22. zofhia says:

    sorry i dont understand how the stocks work

    Oct 14, 2008 | 5:54 pm

     
  23. corrine says:

    Sinumpa ko na yung stock market after the crash. My boss was right…do not go into anything you don’t understand. It’s just amazing how the image of an investment banker has been mired by all these. They were the gods and look what happened. tsk, tsk. Amazing what a mosnter their financial engineering created! Everything boiled down to abuse and greed. What a pity!

    Oct 14, 2008 | 5:58 pm

     
  24. Mila says:

    I spent an afternoon listening to the podcast of This American Life, the topic was the financial crisis and how it started. Stuff I had never heard of before like the credit debt swaps and how the deregulation of these products are one of the reasons for the problems affecting the market. It was very interesting to learn a little bit more about how these things work. So much information that was kept private, how the US treasury is going to be paying for all the assets of little or no worth, and ironically, what the IMF and World Bank was forcing developing countries to do for decades is now going to be employed on the US govt (if there’s a way to enforce those policies).
    Your example for the Teen is what my economics professor did with us for one semester. I remember that we gained about 3% in the 15 weeks we tracked the stocks we chose. It was a good way to learn how money is made.

    Oct 14, 2008 | 6:05 pm

     
  25. Marketman says:

    corrine, I agree with your sentiments to some degree, but equally at fault are hundreds of thousands if not millions of middle Americans who borrowed money they could not afford to pay back, against assets like real estate that have since crashed in value… I think the borrowers take equal blame on this one as well…

    Oct 14, 2008 | 6:06 pm

     
  26. Marketman says:

    Mila, nothing like teaching when it is most likely to be absorbed. Seizing the moment is one of my greatest and most priceless pluses for spending so much time with The Teen as she grew up over the past 13 years… hopefully, it will hold her in good stead in her adult years…

    Oct 14, 2008 | 6:09 pm

     
  27. shalimar says:

    from food to finances … great blog indeed… with the $ losing its value and thinking of heading to Euro land again….

    Oct 14, 2008 | 9:17 pm

     
  28. Jun says:

    here in singapore there is one guy who profit $7M from AIG share where he bought the share when everybody are off loading it just after the lehman brothers collapse. BTW he donated all the profit to charity.

    Oct 14, 2008 | 10:52 pm

     
  29. APM says:

    Something for the teen to watch.

    http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett

    One of his best interviews

    Oct 14, 2008 | 11:41 pm

     
  30. fried-neurons says:

    I got carried away and started playing the stock market during the tail end of the dot-com boom in the early 2000s. Bought “cool” stocks without doing my homework, ended up losing almost $20K, mostly through Global Crossing and Metromedia Fiber Network.

    I’ve learned my lesson. I have neither the time nor training (much less the inclination) to intelligently follow individual company stocks. Now, outside of my 401(k), I only do index funds and Spiders. Strictly long-term now. *sigh*

    Oct 15, 2008 | 1:32 am

     
  31. JR says:

    MM,

    You were right about the predatory lending and those loan officers who made a lot on the commissions.

    I always believe in the free market system and that banks should assess their risk on consumer loans. Government social re-engineering programs should be regulated instead of giving it to Fannie Mae or Freddie Mac to assume.

    As far as I know I am now part owner of AIG because of the government buyout. The gov’t is charging AIG 12% per annum and this is much more than the loan sharks charge.

    My wife and I are in mutual funds that invest in companies that we understand and as consumers too. E.g. Chevron, Microsoft, Wells Fargo, Wal-Mart, GE and Berkshire Hathaway Inc. A.

    I am happy if we make 10% per annum.

    Loss less than 20% of our diversified portfolio but my wife and I have a positive outlook for whole economy. I heard from others that they loss more than 50% of their investments. The way we look at it we are still ahead.

    Jr.

    Oct 15, 2008 | 1:39 am

     
  32. fried-neurons says:

    Also, MM… I agree that some of the blame lies squarely on the shoulders of the borrowers. BUT… I would also argue that most of the “unworthy” borrowers never would have been able to get loans in the first place if it weren’t for the banks, mortgage brokers, and investment firms.

    When the financial types got the brilliant idea of securitizing these mortgages, they went at it with gusto. The lenders effectively removed almost all risk (or so they thought) from their loans because they started selling the mortgage-backed securities on the open market. Then, someone got the even more brilliant idea of hedging against potential losses with those insurance-but-let’s-not-call-it-insurance-so we-can-underfund derivatives. Key word being underfunded. And everyone started making money hand over fist.

    Kaya ayun, when the housing bubble started to deflate, all these fat cat butts were highly exposed to the meltdown.

    One can’t help but feel a bit of schadenfreude, to be honest.

    Oct 15, 2008 | 1:41 am

     
  33. madspartan says:

    Clueless about trading too(good thing my funds are limited). So blame my ignorance when I ask if there are no alternative energy stocks being traded. Just thought that with oil being a limited resource, people would be clambering to put money into alternative energy concerns — just so they can be on board when OPEC loses its power of sway. Or is this a pipe dream? (pun not intended)

    Midway through “hot, flat and crowded” by Thomas Friedman – a bit alarmist, but firmly based on your realities #1 and #2. You might want to check it out.

    Oct 15, 2008 | 6:49 am

     
  34. Marketman says:

    madspartan, thanks for the tip, will definitely try and get a copy of the Friedman book… I have been reading so many cookbooks lately, I have eschewed the finance related ones and need to catch up… :) And yes, there are alternative energy stocks, I am just not familiar with them. Their time will eventually come for the really efficient technologies of the future… fried neurons, I do agree with you… and schadenfreude…boy, that’s a word that is getting a lot of use lately… APM, thanks for the link! Jun, that is amazing that he donated the money to charity, cool…

    Oct 15, 2008 | 7:09 am

     
  35. Gerry says:

    In the simulation you did, maybe you should have given yourselves the liberty to go over or under the stipulated 20K per stock to reflect a more realitistic situation. It adds the element of aggression or constraint when dealing with equities. That said, what do you think of the local PSE?

    Oct 15, 2008 | 10:32 am

     
  36. Marketman says:

    Gerry, I was just trying to keep the example/simulation simple for The Teen, by investing a hypothetical 20K per stock… I don’t own any Philippine stocks and haven’t for a long time… the main reason? I don’t think local companies are really driven by transparent, stockholder driven behavior… so many of them are controlled by single individuals or families, leaving the public as a small minority of the outstanding stock… PLDT is probably one of the few that is world class from an investor’s perspective… but that is only my personal opinion.

    Oct 15, 2008 | 10:56 am

     
  37. RobKSA says:

    fried-neurons, I too started the same time as you and I got very badly. I got greedy seeing friends earn tons of money from technology stocks and dive into it without really understanding anything about it. Madspartan, GE is a play in alternative energy as it has a business in wind turbines, solar panels and stuff like that. There are pure plays in alternative energies such as “green” mutual funds and other companies but I am not a big fan of these stocks right now. If I have to gamble I go for biotechnology stocks (I currently own 2000 shares of EXEL).

    Oct 15, 2008 | 12:33 pm

     
  38. Bong says:

    Coca-Cola! Great choice MM! Bloomberg just reported 3Q profits better than expected because of increased sales in China and India. Looks like they’re not drinking as much tea in these countries like before.

    Oct 15, 2008 | 10:54 pm

     
  39. Marketman says:

    Bong… this is just the beginning… I expect a LOT of VOLATILITY in the next six months, but looking out several years, I am hoping this sample portfolio will yield reasonable returns. But in the short term it could go down another 20-25% if things really tank…

    Oct 16, 2008 | 6:08 am

     
  40. Blaise says:

    Warren Buffet bought some stocks of General Electric too, so I guess that is a very good choice for The Teen.

    It’s nice to be back..

    Oct 16, 2008 | 1:06 pm

     
  41. Mangaranon says:

    The “safest” way to be in any market is to do it the fold fashioned way — eschew margin. Debt, after all, is the “drug” of finance!

    Oct 16, 2008 | 5:22 pm

     
  42. erbie says:

    MM,Thanks for making my sunday complete. The Teen is sure lucky to have you as financial mentor and dad.. :)

    Oct 19, 2008 | 11:23 am

     
 

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