Dan on August 16th, 2015

When I saw that Berkshire Hathaway was buying out Precision Castparts last weekend, I got that good feeling you get when you know one of the stocks you own was about to increase in value.  However, as I looked at it a little closer, it just made me feel like I missed an opportunity.

I started accumulating Precision Castparts late last year, when it showed up on my list of stocks that met my criteria.  Management seemed to be sound, stable industry, reasonable valuation – a good long term holding.  Unfortunately for me, my timing was lousy because soon after I built my initial position, the stock dropped roughly 20% on lower guidance due to the strong dollar and exposure to the energy sector.  I think I should of looked closer at the stock before  I started accumulating, perhaps I would of held off a bit.

Precision Castparts Stock Price for 2015

Precision Castparts Stock Price for 2015

I will give myself some credit –  I did add to my position even after the stock dropped – I try to follow the old saying ‘If you liked the stock when it was 20% higher, you should really like it now.’  It’s hard to follow this adage, but I felt the leadership was still good and hopefully most of the bad news was out of the way.

So its nice that in the end my analysis was vindicated, and I can now claim to almost be as smart of investor as Warren Buffet.  However, in the end, if feels like I botched it.  At the Berkshire Hathaway takeover price, I will probably break even on my investment, maybe come out a little ahead.  To add insult to injury, that position I added $210 a share will likely be taxed as a short term gain,  and its possible my initial purchases will be a long term loss, though it will be minimal.

I have come to accept that in investing you win some and you lose some – it just comes with the territory.  It’s just that in this case, it feels like I should of won and I didn’t.

Dan on August 7th, 2015

For the last few years  I have been tracking my asset allocation on a spreadsheet, to ensure that I keep within the rules I set for myself of what to invest in.  If I look back to the early days of my investing, I believe I have a tendency to overweight in stocks when the market is doing well, and underweight when the market is low.  Most investors do succumb to this emotional tendency – buy high – sell low, and so I think every investor should use an asset allocation strategy to try to drive emotion out of investing.

As part of my ongoing tinkering with JavaScript libraries, I decided to embark on the project to migrate my spreadsheet to a webpage, where anybody can use it to experiment with asset allocation.  The resulting tool now appears on the vfsystems.net site at http://www.vfsystems.net/investing-tools/asset-allocation-tool/

VFS Asset Allocation Tool

 

Note that my sample allocations are spread across a wide variety of asset classes.  This tool includes a lot more categories than the average investor would care about, but I thought it was good to include as many categories as possible to at least make investors think about what categories to consider.  Note also I included the red and green arrows next to most asset classes.  This isn’t too clearly explained in the page – but it ties back to some of my earlier work in asset allocation where I adopted a strategy of over-weighing  categories based on momentum.  To recap – historically if you overweight / underweight the S&P 500 based on a 10 month moving average, history tells you it will increase your return.  So I have expanded this to include overweight / underweight indicators for the other asset classes where history shows a return increase based on momentum.  Note that some asset classes show no correlation to this strategy, and for those  I did not factor those into the weighting adjustment.  As a side note – for those categories I plan to someday look into what factors could also be included to see if a pattern can be determined – but thats on my ‘someday to-do list’ at this point.

On a technical note, this project was quite interesting.  This was my most complex JavaScript library project to date.  Other than an API call to Puget Investor to get the initial asset classes and weightings, this application runs client side, using AngularJS and JQuery.  So even though it runs in WordPress on PHP, there was no PHP coding other than adding the scripts for Angular and JQuery/JQuery UI. The Angular JS part of it was pretty smooth – interestingly it was the Jquery UI stuff that gave me the biggest headaches.  I use JQuery UI to build the help dialogs over the question mark icons – and I formulated  a standard pattern that I plan to incorporate in future projects for these help boxes.  But getting the dialogs to position and resize correctly took me much longer than I had anticipated, largely due to changes in JQuery between versions 1.9 and 1.10.  One of the hazards in using the internet for all your research is you find examples for many different library versions, and its hard to find the right example for the version you are using.

The other framework decision I made with this tool was to host this at vfsystems.net.  Rather than have these tools on Puget Investor, I plan to have VFSystems be the home for my investing tools, and focus Puget Investor back to a stock portfolio tracking tool.  I think vfsystems.net makes for a better jumping off point for my various investment related endeavors, so look for more tools to appear at vfsystems.net.

I encourage anybody with an interest to try out this new tool – it may help you refine your investment strategy, and perhaps give you new ideas about investing alternatives.  And please – any ideas for improvement or feedback – please leave a comment below, or send a note to Vertical Financial Systems.

Dan on July 24th, 2015

Call me crazy, but tell me if you have heard this story before.  A huge tech company under a visionary leadership has a market dominating product and rakes in tons of money.  The visionary leader then leaves the company, handing it off to a hand picked successor who’s job it is to continue the winning tradition.  After several years, the new leader just focuses on monetizing the cash cow that is the market dominating product, and fails to innovate leading to a stagnation of the company.

Perhaps its too early to be ripping Tim Cook- the CEO of Apple, but I am starting to sense a similarity to the Steve Jobs –> Tim Cook story that played out as the Bill Gates –> Steve Ballmer story.   Is the I-Phone Tim Cook’s equivalent to Windows?

Apple’s earnings this quarter was a disappointment for investors, sending the stock own over 5% after the release.  Apple is still shipping tons of iPhones –  47.5 million units for the quarter (!) vs an anticipated 48.8 million.  But the disappointing iPhone numbers aren’t what got me thinking -its the innovation.

Apples new product launches have been rough.  The Apple Watch launch was botched – and the product itself was not terribly innovative compared to other Android and other wearables out there.   Then, the Apple Music launch was also botched – and the Apple music product is not a significant improvement over other streaming services such as Spotify or Pandora.  The Apple Pay launch was done better, so not all is going wrong, but Apple is held to a higher standard than other companies.

Perhaps investors have started to take notice.  Apple stock has had a huge run in the last several years, but looking at chart since the start of the 2nd quarter of 2015 – Apple is losing ground to the other big-tech companies:

applechart

So call me jaded – but as a former Microsoft investor who saw Microsoft skyrocket in the 90’s and then stagnate for 10+ years under Steve Ballmer’s leadership, I think I am going to watch Apple from the sidelines until I see signs of the  old Apple Magic.

Dan on July 19th, 2015

The Donald Trump candidacy has had me stumped as to what he is up to. Many observers believe his candidacy is being powered by some third party (Democrat or Republican leaning), and I can subscribe to that theory.  But what’s in it for The Donald?

The one thing of late that has stood out as odd to me is Trump’s focus on his net worth. He has repeatedly gone out of his way to talk up his net worth – so much so that I think there is more to this bluster than just ego.

So I have a theory on maybe whats going on here. Stay with me here as I do some math. Lets say Trump has 10 buildings with a true market value of 1 Billion (10 buildings at 100 million each), each with a mortgage of 90 Million. That would give his net worth in these buildings 100 million (1 billion – 900M in debt). Lets say his friend wants his help in getting someone elected for President. His friend invests 51 million for a 1% equity share of these office buildings, along with a personal services/media consultancy agreement with Mr. Trump (an agreement valued at say, 1 million).

Once this agreement is signed, the “market value” of Trumps 10 buildings is now 5 Billion (50 million * 100) – the accounting theory that if one person would pay 50 million for 1% share, there are 99 other people out there willing to pay 50 million each for the rest of the equity). Trump instantly gained 4 billion in net assets.

Trumps next move? Fleece the silly bankers that will loan him a few more billion against his buildings, then when the market value goes south squeeze the bankers with threats of defaulting on the loans and giving them the buildings.  And as a political candidate, he has the potential of distributing future political favors – and what banker could pass up on that perceived opportunity?

So when Trump is bragging about his net worth – I think he is talking to his bankers – that’s his end game – with the side benefit of having a grand time making headlines, running a reality show, and pretending to run for President.

Meanwhile, Trump’s friend gets to influence the political process in a brilliant use of media, without having to deal with a political action committee or any election regulations (well.. whats left of them).

So if my theory is right, and the main motive for Trump is to up his net worth in order to fleece stupid bankers by getting them to loan him money against ethereal assets, he may have my vote.

Dan on July 17th, 2015

I think I may have missed the point of this whole commercial drone revolution.  Up to this point I have seen drones as a photography platform – but for commercial use kind of a niche product (i.e. real estate virtual tours, crop photography, etc).

However I am seeing some new applications that are starting to change my thinking.  There is a lot of money going into flying drone applications, and I think someone will hit upon a mass market product.  Take a look at these examples:

  • Hoverbike Drone 3   – for $15oo you can buy a drone that can carry 10 pounds.  That could have a number of interesting home and industrial usages at that price point.   The perfect gift for the homeowner  – add on components could perhaps clean those  upper story windows, trim branches on tall trees, clean the gutters with an on board vacuum system?
  • Hoverbike Helicopter  – the same company is building and taking pre-orders for a drone that can carry up to 200lbs 100 miles or 45 minutes.  In theory a ride-able drone – think Star Wars:

    Hoverbike


  • Here is an example of another prototype of a ride-able that set the Guinness world record for flight distance:

    World distance hoverboard

  • Finally, my favorite new drone based camera – check out this video from Lily – this sure makes a Go-Pro camera seem so-20th-century.:

So these few examples show that with all the money pouring into commercial drone technology, there are some interesting future possibilities.  There are still lots of regulatory issues and societal issues with the annoyance factor of drones, perhaps that will be the biggest short term obstacle.  But is it out of the realm of possibility, that in 10 or 15 years – the drone will be as ubiquitous as a cell phone?

Dan on July 9th, 2015

The whole Greek Debt issue has not really been in the front and center of my economic universe, as it had been a pretty boring story of debt deadlines and extensions.  But to me, the resounding ‘No’ vote by the Greek people, saying they will not accept the ‘best’ deal the creditors have to offer.

I credit the new Greek government – whom I think the creditors have underestimated.  I would not like to play poker against these guys – I think they are playing their hand  very well.    By getting a resounding No by the people through the public vote, they now have a stronger bargaining position.  And I think they know that the Greek creditors need Greece to agree to some restructuring more than the country of Greece needs the Euro.

Look who owns the debt owed to Greece:

I can’t see the how the European bankers will let Greece just walk away from the debt.  Sure the debt owed to Italy and Spain is only about 2% of the companies respective GDP, but that would put a dent in their economy (and with Italy at 10%+ unemployment rate and Spain at 20%+ unemployment rates – can they afford that?).  The Germans are the ones maintaining the hard line – not surprising since they have a healthy unemployment rate and their debt is less than 1.5%.

Anti-Banker Bernie Sanders came out with a statement praising the greek no vote.  Bond King Bill Gross sides with the Greeks on this negotiation.  All the while the bankers are saying how stupid the Greeks are for turning down the deal.

Blame should go to the bankers for throwing good money after bad.  If I were a betting man, I would bet the European banker cave in and  Greeks get a sweeter deal – the Greeks know that the bankers may be in too deep.

Dan on June 26th, 2015

An interesting overview by Paul Ford into the world of software development in  general – spoken from someone in the trenches – and much of what he rights rings true with me.  A very long read, but if you skim or jump around, you are likely to glean some interesting thoughts and ideas out of it:

http://www.bloomberg.com/graphics/2015-paul-ford-what-is-code/

His open about what a new Chief Technology Officer (CTO) says when joining a company is a paraphrase of what I have heard all new CTO’s say when they come to an organization:

All of the computer code that keeps the website running must be replaced. At one time, it was very valuable and was keeping the company running, but the new CTO thinks it’s garbage. She tells you the old code is spaghetti and your systems are straining as a result.

And in most cases the statement has some truth to it.  Every company has legacy code issues – since business rules change and technologies change.  The term “technical debt” refers to a way to estimate the size of your legacy code issues, which is a great analogy, because who is to say when you have too much debt – or how much effort do you want to take to ‘pay down’ your debt.  It’s ultimately a decision that business has to make.

In addition, the issues of legacy / outdated code is getting worse – primarily because of technological advances.  With all the advances of broadband, new devices and internet infrastructure, new languages and frameworks rise and fall in what seems like 2-3 year cycles.  The rise of new javascript frameworks like AngularJS and React in the last couple years, most traditional websites and web applications could be considered ‘garbage’ by a new CTO.   Even if you started writing your enterprise application in AngularJS (1.x)  today – it will likely be out of date by the time you complete it – because AngularJS 2.0 is soon to be out – which is a huge rewrite of the language.   Right now there is a huge explosion of new languages and frameworks, and many people will write applications using a language or framework that will not survive.  Once a language dies, programmers no longer ‘speak’ the language, and the application eventually has to be re-written.   I have applications that I wrote in the 90’s that I have rewritten at least 4 times as languages progress and the internet has evolved.

One last thought on this article – midway thru the article is a piece titled ‘The Time You Attended the E-mail Address Validation Meeting’.  If you have ever wondered about what goes in on meetings amongst software developers, this gives great insight into how a typical technical discussion goes.   I have been in many meetings (even email validation meetings..) where the development process goes something like that.

After reading this article, perhaps you will have a better appreciation for the world of coding, the issues of today, and why so much legacy code exists.  The software development process and explosion of languages has gotten pretty crazy over the last several years.  But software development is still an entertaining and mentally stimulating process for us developers; and every time I rewrite one of my applications… I still learn something and find myself enjoying the challenge.

Dan on June 13th, 2015

I recently moved one of my email accounts that did not have spam filtering, and immediately had my inbox flooded with spam.  I averaged about 40 – 60 spam emails a day – with  the usual topics repeated over and over.   Interestingly, the amount of spam I got on the weekends was a lot lower than during the week – which I take is some sort of logic in the spammers algorithm to make them seem to be legitimate businesses?

Anyway, that got me thinking about the response rate that these emails generate – there must be a rational business case to sending these emails over and over.

The most recent study I could find was from 2008 – the study itself is a complex read,  but this article provides a good summary.  According to this study in 2008, about 1 in 1.25 million emails resulted in a sale.  Since this spammer infected other machines and got those machines to send the emails, the actual cost to the spammers was likely low enough to make this a viable business model.  It would be interesting to see an updated study – since 2008 more (likely inexperienced web users) are on the internet, however spam filters have gotten better.  But given the prevalence of spam, the business model must still work.

In fact, we can now look forward better, smarter robo-callers.  This report of a new technology is an example of what is coming as computers are getting better  at holding automated conversations.  This technology is probably more expensive to disperse than spam, but the response rates are likely higher.

And finally, one bit of spam trivia- here is a great explanation as to why the Nigerian prince emails that most people have received over the years are not polished and have misspellings.  It is likely intentional, as a way to screen people who would not fall for the scam. As a spammer, you would only need to engage those people who can’t read well (and are likely economically disadvantaged), or desperate enough to overlook the suspiciously bad spelling and grammar.  Seems logical to me.

As with any marketing technology, it will be interesting to see if the tools to block advertising can continue to stay ahead of advertising innovations.  Regardless, my guess is advertising in all the media we consume will continue to find new ways to annoy us.

 

Dan on May 30th, 2015

Bill Gross has long been considered a Bond King, until recently the fund manager at Pimco Total Return which is the largest Bond Fund in the world.  He has been a media celebrity since the mid 1980’s, and had a well publicized falling out with Pimco which tarnished his legacy.

I  have always found his opinions on markets worth listening too – and his latest published outlook on where we are headed strikes an interesting tone.  Gross is now at Janus Funds, where he appears to have editorial license to say what he wants. Perhaps because he is turning 70 years old he is overly gloomy, but he obviously doesn’t like what he sees down the road.

A few excepts from his letter:

 

On the current world view that Quantitative Easing will cure the world debt crisis:

(At a recent conference) I equated such a notion with a similar real life example of pouring lighter fluid onto a barbecue of warm but not red hot charcoal briquettes in order to cook the spareribs a little bit faster. Disaster in the form of burnt ribs was my historical experience. It will likely be the same for monetary policy, with its QE’s and now negative interest rates that bubble all asset markets.

On the end of the financial bull Market:

When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.  We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion.

He makes an interesting point about fees charged by investment professionals:

Active asset managers as well, conveniently forget that their (my) industry has failed to reduce fees as a percentage of assets which have multiplied by at least a factor of 20 since 1981. They believe therefore, that they and their industry deserve to be 20 times richer because of their skill or better yet, their introduction of confusing and sometimes destructive quantitative technologies and derivatives that led to Lehman and the Great Recession.

To read the whole article, click here.

Dan on May 20th, 2015

At the end of last year,  I wrote an article on Seeking Alpha wondering if 2015 would be the year that eMagin turns around.  eMagin is a company I have followed for years, and the company has always shown great potential, but never achieved.

Recently their earnings came out, and on May 15th the stock popped up to 33% on good earnings – the appearance is that they are starting to ramp up on production, and breaking into the potentially lucrative market for virtual reality headsets.

eman

 

So is this the turnaround that I have been long awaiting?  I would recommend anybody invested in eMagin read the earnings call transcripts on Seeking Alpha.  As per usual, the call is upbeat, and the description of market opportunities leads one into wanting to back the truck up and load up on shares.   However, I have been too jaded by previous upbeat results, and while results were encouraging, the top line revenue numbers still don’t get me too excited.

The big highlight on the earnings call (other than having a profitible quarter after 7 negative quarters) was the progress on the virtural reality headset.  From the earnings release highlights:

  • We finished the development of the Company’s new advanced Head Mounted Display (“HMD”) headset. The HMD has been demonstrated to potential partners and customers in April and May. This HMD is immersive and incorporates eMagin’s latest high-resolution OLED microdisplays and patented optics and is a paradigm shift in the look, performance, weight, and size of Virtual Reality (“VR”) HMDs. The OLED microdisplay and the optics are the fundamental reasons that eMagin’s HMD is half the weight and size of its VR HMD counter parts. The field of view (“FOV”) exceeds 100 degrees on the diagonal with a resolution of 4 megapixels per eye.

Management is talking a big game about breaking into the virtual reality headset market, and mass producing their product to meet huge demand.   It appears they are working on a very high end display – which may well be best in class – however cost when producing consumer goods (especially consumer goods in a new category) will be a huge factor to the product’s success.  If they can provide a premium display and a cost similar to the competitors – then I may start to get excited.  They have some big competitors in the space, and there is a lot of attention on the virtual reality market opportunities in the near future.

So I for one will wait another few quarters before getting too excited  watching and waiting for those revenue numbers to start moving up.  I am encouraged by the long awaited profitable quarter, but I am still not sold that this is turnaround moment all investors have been long waiting for.