Now a Genius kaChing investor with nearly 50% annual return and a founder of Kawai Capital, Andy shares his personal story that led him to where he stands today.  Learn about what drives him and hear his advice to the investors on how to keep things in proper perspective and understand what truly matters in life.

“So Andy, can you tell us about how you ran into kaChing?”

kaChing has been around since 2007. A friend of mine simply invited me to this stock app on Facebook. I was a graduate student at Northwestern University at the time, working on a Ph.D. I was in a lab working on electro-optic thin films, but my mind was definitely on stocks and the business of technology. My passions have always been with science and business, but it took some time for me to realize that I could not tolerate 4-6 years of engineering for engineering sake. Business, science, and technology always fit together in my mind.

As for the story of how I came to be a genius mirrored investor on kaChing, long story short, I continued to post solid gains on its simulation with real-time prices and simulated commission and slippage costs. As a result, I came to be ranked high quite consistently on its site. Outside of a few months leading up to the financial crisis, I have always been on kaChing since the outset, and have always ranked high regardless of the ranking criteria adjustments made over the years.

“What do you currently do full-time? Also, with the recent launch of trade mirroring at kaChing, do you find it even more challenging to balance between work and passion?”

I currently work out in San Jose as an electronics component technical salesperson. It was one of a handful of positions I could choose from in the midst of a bad recession. Another choice was to work at a well-known TV station in Indianapolis, but I chose the position that put me in the heart of Silicon Valley. It is not glamorous, but I am grateful to have had the opportunity to ‘feel out’ perhaps a hundred different technology companies in the bay area and throughout the US.

You can pick up a lot from visiting a company—the energy level, the sense of urgency, the sense of participating in something worthwhile, the integrity and ethics of people that make up a company.  These are all important factors that are at the core of business. Moreover, since the business I am at is a small operation, I have had the chance to see how managerial decision making, finance, supply management, sales, marketing, collections, legal, etc. all fit together.

“We know you studied science in school, and now you’re one of the most successful investors on kaChing.  What led you to the discovery of passion in investing initially? “

It was a number of things, but family influences have played a big role. Good investing runs in my family. Since a young age, my brother and I both had a passion for sports trading cards. We knew what things to look for in a player, in a set, or in a card. While I gave up that interest, it was more or less the pee-wee leagues of investing.

At age 14, I began analyzing stocks. This came from reading numerous stock books. In the earlier days, I read more daytrading and swing-trading technical analysis books.  What I picked up from that period was a need for meticulousness and discipline, and an understanding that ideas need to be linked to results systematically and across a large number of samples and cases.

Also during my teen years, I discovered that my grandfather had made a small fortune investing in real-estate in Japan. He had bought property in Japan, only to see the value rise several thousand percent. I also learned around the same time that my mother’s aunt had begun investing under the tutelage of my great-grandmother with a modern day equivalent of around $50K. Over the past 60 years or so, she has done very well for herself investing in domestic (Japanese) stocks.  Being modest, she attributes her successes to a booming market during the 50s and later in the late 80s; however, I know better that even though the markets have fallen off dramatically from the 90s to now, she has fared well and counted very few losing years amongst countless years of high double digit gains due to her skill.

“So your family initially had a big impact on your inspiration to be a successful investor.  Can you tell us about your developments since?”

Getting back to how I became interested in investing when my academic background is Chemistry and Material Science at UCLA, I have to go back again to my early teenage years. Thanks to my father who indulged me in all books and magazines, I read hundreds of technological business books and magazines.  One magazine which I still own (in a box tucked away in my parents’ house) is a late 90s copy of Red Herring with Vinod Khosla on the front cover.  Back in those days, Red Herring had the latest juice on a fast-changing Silicon Valley. The biography of Vinod Khosla and how he came to the States with little to his name but a spot at Carnegie Mellon, and later making a fortune in Daisy Systems and Sun Microsystems deeply impressed me.

Additionally, I’ve read the stories of high-tech entrepreneurs Robert Noyce, Gorden Moore, and Andy Grove of Intel, the story of William Hewlett and David Packard and their humble beginnings in a garage, and more recently the story of Liu Chuanzhi and Lenovo.  These and many more biographies and articles of great leaders and large-scale entrepreneurship have all inspired me.  Now the inspiration did not come from their amassed fortunes, but rather the innovation and intellectual versatility these leaders needed and demonstrated. Learning about their undying passion, hard work ethics, ability to inspire teamwork, and most importantly, their struggles as human beings on this planet trying to carve out a better future and making it happen all motivate me every day.

Thus in my mind, business, science, technology and philanthropy have always been interlinked. When I went to UCLA or Northwestern to study material science, my goal was to become an inventor/entrepreneur. I was never interested in a teaching career, or even a laboratory career at an established firm.  As I grew older and shed my naiveté, I came to realize that I may have better opportunities impacting the business of technology in a major way outside the path of lumbering through a Ph.D. and applying for grants to fund my inventions.  Finally, a recurring problem with a medical condition called IBS, and a lack of chemistry with my research advisor, a man I respected, but whose work I could not find any passion in, sealed the deal.

Shortly thereafter, I decided to leave Northwestern’s prestigious Material Science program.  Even to this day, I find myself scared sometimes that I might have made a poor choice. However, my belief that God has a plan for all of us, and this recent ‘run-in’ with kaChing keeps me very optimistic.

Lastly, Mr. Andy Rachleff, CEO and co-founder of kaChing is one of the most successful venture capitalists. I find it very fortuitous that I came across and was receiving investing guidance from him through kaChing.  Up until perhaps July or August, I had no clue as to who Mr. Rachleff was! I respected him for his intellectual consistency and incisive comments; however, it was only through a Google search following discussions of kaChing going ‘live’ to real money, did it become clear to me that this person I was talking to was the main VC behind Blue Coat Systems, AOL, and Shasta Networks amongst other startups.

“So you have had many consecutive years of a positive return.  However, as investors, we all make mistakes.  Can you share some of the “bad” trades you’ve had in the past? What did you learn from it?”

My worst period was late 2000 and early 2001. I lost a lot of money not at the initial dot com bust, but trying to catch old leaders on a bounce thinking I was getting a bargain. As a neophyte to market crashes, I gravitated towards names like Cisco and Oracle after their stock’s first major drop, expecting a rebound. Boy! Was I wrong? At that time, I had money invested in a joint account with my girlfriend at the time. We both posted double-digit losses, and eventually decided to step away from the markets for a while.

Another mistake I made back then was putting too much trust in a well-known stock and mutual fund rating service, which is still very much in business and popular. ARMHY was a stock this service consistently rated highly, which has treated me unkindly. The stock still trades under the symbol ARMH, so the rating service may yet have the last word if its recommendations were meant for the long-term.

In any case, from the dot-com crash onwards, I came to understand the real meaning of ideas that I had only read about originally, such as systemic risk, stock trends through feedback loops, and George Soros’ theory of reflexivity. This experience has helped me to post gains in the most recent stock market crash of 2008.

“Do you have any advice to other kaChing investors who are trying to become the next ‘Genius’?”

Yes. It is general advice on investing, which should translate to a better ranking on kaChing. I have 4 pieces of investing advice:

1)   Dealing with systemic risk is an issue of timing. It is easy to buy into the idea that weathering the storm through sitting still is the best course of action. While overtrading is a costly mistake, when that rare level 5 hurricane hits, an astute investor must react via shortening the investment horizon and exploiting the opportunities that arise.  I would advise investors to be nimble and quick, but not to hurry when getting back in. Specifically, finding the bottom is only possible after the bottom has passed. Getting in, and missing the first few weeks or months of the bounce  is the small price paid to avoid the costly mistake of getting back in too early only to find that the bottom is half a year off. When GE fell Oct-2008, a friend of mine made the mistake of thinking he had a bargain at ~$20 only later to see a low of under $7 in a few short months. Similarly, a very intelligent friend with an MBA bought AIG around the same period, only to see it dip to lower lows in March and in mid-July. Often times, these further dips are not purely technical but are driven by fundamentals that are slow to be uncovered.

Because you can never know if a stock will fall further during panics, I like to know the survivability of a company before getting back in. Of course, I would look at the fundamental prospects and relative valuation of a company. But I am particularly interested in cash, cash flow, and low debt levels. What I am looking for is the company’s ability to weather a multi-year recession or Depression.

My mother’s aunt, who has 60 years of investing success, taught me that during these catastrophic periods, defensive sector companies (low-end consumer staples, defense, medicine, etc.) with little debt and high cash are attractive plays considering the reduced level of risk, and the company’s relatively secure revenue base.

2)    Outside of market crashes, the way to reduce risk is in avoiding excessive trading costs via having a long-term perspective, and in diversifying adequately. Avoiding excessive trading is more important than ever outside of calamitous market situations since well-equipped and well-funded traders are finding new ways to eek out more from ill-equipped traders. Day trading on technicals and split second information is a business for the well funded and for those with the cutting edge technologies.

Most think direct access, low commissions, and a knowledge of technical analysis is enough. However, besides the fact that many technical tools lack both a logical nexus and enough examples to statistically prove a technique’s worth, those well-funded professional traders will always have a “vig” over the small-time day trader due to their access to better technology, greater speed to information, exploitation, and execution. Therefore, an individual investor can mitigate this disadvantage by having fewer trades over the long haul.

3) On diversification, my ideas and advice is simple: examine both historical asset correlation and common macro-economic drivers.  Free correlation calculators are available and can be found via a Google search. Ideally, one shouldn’t just stick to stocks either. Stocks, quality bonds, and real estate around the globe could potentially form a well-diversified portfolio.

Furthermore, historical correlation is a mathematical concept that can be picked up and incorporated into a diversification strategy by the average investor, if that investor has the patience and willingness to learn. The other part of diversifying is in identifying macro-economic commonalities amongst the companies involved. For example, do they all receive their revenue in dollars? Are rising oil prices detrimental to the bottom line for all the investments owned? Obviously, the idea is to mix investments such that when, say the dollar rallies hard, that development does not negatively impact all investments simultaneously.

4)    My final piece of advice is for investors to keep things in proper perspective. My mother’s aunt told me in 2009 that some of her stocks recently dipped 20%, but she is still grateful to the company because of the great performances she benefited from over the last 60 years. Perspectives change when having a longer term view.

Furthermore, when it comes to investing, I would say that it’s only money at end of the day. When considering many issues I’ve had in the past with family during my rebellious teenage years, a debilitating health problem, periods of isolation and an utter lack of self-discipline and God, and the pain of neglecting certain aspects of my life that were truly important, I have come to understand the true priorities in life. Though I risk coming off as being philosophical or pretentious, I would say that the greater returns in life come from investing in family and friends, in God and spirituality, in health, in self-discipline and in lifelong learning.

As one of the kaChing’s Genius investors, Min stands strong at the top of the hill.  With a kaChing IQ of 172, he is now the top kaChing Genius performer generating nearly 200% annual return (as of October 2009).

Probably by now, there are many spectators following Min wanting to ask more questions.  Well, now you get to learn more about him, thanks to Min and his insights he shared with us.

“Min, you currently hold the highest kaching IQ and the highest return amongst the Geniuses.  You also stick to your strength in healthcare consistently, and it certainly pays off for you.  How did you get to where you are today?”

It is definitely flattering and exciting to hold the top spot at the moment, especially knowing I am up there with a group of other very talented Geniuses, many of whom have decades of experience and manage millions of dollars in assets professionally. I am grateful for the opportunity to help others looking for a better and cheaper alternative to invest their money away from the typical mutual funds and brokers, while hoping to significantly beat market indices.

For the past several years I’ve worked in healthcare IT for a major medical institution. Being surrounded by medical practitioners and academicians, witnessing life-saving therapies being applied, and directly being involved in advancing IT infrastructure technologies and Clinical applications due to my job role, I developed a keen interest in the healthcare sector.

The real turning point was a few years ago when a small biotechnology company I owned got acquired by Pfizer. I originally purchased the stock deeming it was severely undervalued and the company was ripe as a takeover candidate. Seeing the actual fruits of my labor and realizing a lot of money can be made further sparked my interest, and it was at that moment when I started focusing solely on biotech and pharma companies, and here I am today.

“You look for undervalued stocks in biotechnology and pharmaceutical sector.  You then trade on momentum while investing on fundamentals.  We clearly see the end result of your strategy, but what are some of the resources you utilize to make that happen?”

An important aspect of any investor’s success is having an open mind and willingness to engage with other investors, either bullish or bearish on your stocks, to gather rational opinions. In the healthcare sector for a non-MD and PHD especially, there are complexities in understanding  a company’s drug mechanism and translating published clinical trial results. I am fortunate however to have a network of investors I talk to, many of whom are MDs, PHDs, statisticians, and investment professionals. They are not always right, but their insights and knowledge are priceless.

Outside of my close-knit group of contacts, the Internet obviously contains a wealth of information as long as you can pick the good ones from the bad. Let me give you a few of my regulars:

Investorvillage.com – This is a moderated stock message board with a mature audience base coming from all backgrounds. Now, the tricky part about message boards is that people are usually free to say anything, albeit following the website’s posting rules.  Therefore, you really have to judge their true agenda.  When you interact with a group of investors bullish on a particular stock for example, the individuals will suffer from “groupthink” oftentimes.  Furthermore, they will ignore differing or challenging analysis, and oftentimes even call you a “basher”.  A good investor should always evaluate both sides of the story and should never “fall in love” with a stock.

TheMarkets.com – Here you will find sell-side and macroeconomic research reports from thousands of institutional brokers, such as Goldman Sachs, Morgan Stanley, and Deutsche Bank. I am mentioning this website because I utilize it, but most non-industry individuals will not have access to this unless they have deep pockets. Subscription to this website is $2,000+/month, but fortunately for me a nice contact of mine granted me access.

Sumzero.com – Jeff Borack also mentioned this site. This private website caters to industry professionals like portfolio/hedge fund managers and analysts, but they do accept a small amount of private investors, me being one of them. You will need to send them a compelling research report and tell them why you deserve to be a member. What I like about this site is access to interact with investment professionals owning the same stocks you do, and the opportunity to compare each other’s financial models.

“What exactly do you look for in these companies?”

Biotech companies are very tricky to evaluate because most are cash-flow negative, and my analysis is based on perceived future value. I dissect the company and analyze every aspects of it, such as financials, management background and vested stock interest, institutional buys and sells, drug’s clinical efficacy and safety data, market potential , and competitive landscape. I compute a discounted cash flow model on my own to try to estimate what a stock would be worth if it were to reach the marketplace.

In an article piece interviewing Joseph Edelman, a prominent healthcare hedge fund manager, he stated “biotech stock prices are governed by the disparate forces of perception and reality.”  The binary events, or what he calls the “reality points”,  for these stocks are news of the clinical trial results, FDA advisory panel meeting review or approval, and quarterly financial results once the product has been approved and launched for example.  In between those “reality points” I try to exploit the stock’s momentum, up or down, and after much due diligence I may also let the stock sit through an anticipated clinical data release or FDA approval date only if I think it will be successful.

The key is always to find the best risk/reward profile of a stock. I do not invest in a stock I think will have a 20% upside potential when the downside risk is an identical 20%. I’ll give you an example. Let’s talk about DNDN since everyone always asks me about this stock, even though I’ve had many other big winners like VNDA, which I bought at $1 and sold at $13. I bought DNDN stocks around $4/share on kaChing and traded options on my personal portfolio. After much research, I evaluated that the upside potential for DNDN was $20/share, with downside risk a conservative maximum of $1 ($3+ cash/share with no debt, not even including any other assets) and heavy short interest (short sellers will naturally becomes buyers when covering) , so 500% upside and 25% downside. Yes, a 25% downside is significant for a large cap stock especially, but not for a small-cap speculative biotech stock with a MUCH larger upside potential, and in this case 500%! Remember, this is all about finding the best risk/reward.

“How has your experience been since the trade mirroring launch?”

So far it’s been phenomenal, even though trade mirroring only started a week ago. It’s exciting to see my portfolio shown on CNBC and talked about on Internet news articles.  I also receive a lot of questions on my wall post but I am willing to answer them to the best of my abilities, as long as people are not asking for personalized advice (due to legal restrictions).

“What do you enjoy doing with your personal time?”

Outside of my regular job and doing daily stock homework to maintain my portfolio on kaChing, it does not leave much room for playtime.  At the same time, I try to squeeze in as much activities as I can.  I’m down to earth and like simple things like just laying on my couch or bed and watching TV shows, oftentimes needing to play them back from my Comcast DVR.  Some of my favorites are 24, Entourage, Californication, Dexter, Top Chef, Man vs. Wild, and The Office (the fourth episode this season was hilarious and should’ve been the ending instead!). I don’t watch much sports but love watching the UFC, with favorite fighter being Quintin “Rampage” Jackson due not only to his fighting acumen but also likable personality.

Outside of the house I like to dine out with friends and try out different restaurants and visit local attractions. I live in the San Francisco Bay Area so I never run out of places to go. I also like to visit the race tracks and track my car, a modified Nissan 350z, around a circuit. This Winter I plan to visit Lake Tahoe a few times to go snowboarding.

“Lastly do you have any advice to those who want to follow your footsteps? I know it’s not as simple as investing in bio/pharma stocks hoping for the big surge.”

I actually don’t recommend beginners to start investing in biotech or pharma stocks with real money on their own. My field is a niche focus, and really only for those with experience and the right contacts, or who are willing to spend hours a day researching and understanding the stocks in the sector.

Now it has paid off.  With an “kaChing IQ” of 144 and nearly $200K invested in his assets already, Jeff is ready to prove his worth.   He has kindly agreed to be interviewed, and now we can get to know him better.  Enjoy!

“So Jeff, can you tell us more about yourself?  Being a Genius investor on kaChing is certainly a challenging hurdle to overcome.  How did you get to where you are today?”

I’d say that I got to where I am today because of an odd mixture of good and bad luck. I’ve been unlucky that the economy and the financial job markets have been so weak, but I was lucky that I didn’t really have any financial responsibilities like student loans or a family to force me into the wrong career track.  As a result, I have been able to focus on developing my skills as an analyst by working as an intern at a hedge fund, passing the first two CFA exams, and reading as many books as I could.  My high ranking on kaChing is really just a by-product of that.

“Can you tell us a bit about your internship experiences?  What did you learn from the experience?  Do you trade any differently because of these experiences?”

If it wasn’t for my internship experience, I would be a completely different person today.  The hedge fund I worked at for two years was very small.  They had two managing partners, an analyst, and a guy who split his time between analysis and managing operations.  So I had access to some very smart investors with a great track record, and they really opened their business up to me.

The most important thing I learned was how to model a business in Excel.  By working with their models I learned about financial statement analysis, how to drive revenue expectations, and how to translate these things into future expectations and a range of possible valuations.  I don’t know where else I could have learned to do this so quickly. This was far more valuable to me than a full year of MBA coursework, and I took full advantage of it.

The best part about my internship was the tremendous amount of freedom they gave me. Sometimes they would give me projects to work on that could take anywhere from an hour to a month to complete, but each was always relevant to my development.  And other times they would set me free to identify interesting investment ideas on my own and report on them.

When I started gaining confidence in my analytical ability, I began trading my ideas on kaChing and publishing my research online at harbor.typepad.com. Unfortunately, I wasn’t able to make money for myself with these ideas.  I was living off my savings, and they were quickly running out.  But a few months ago, I got some money from grandpa and I was finally able to buy into some of my own ideas!

“Are you excited about your new endeavor at kaChing?  I would imagine that having an impact on other people’s money is a whole new set of challenges. ”

I’m extremely excited about the opportunity kaChing has given me by allowing investors to mirror my portfolio with live brokerage accounts.  I think they’ve really put together a great website and the business model has an enormous amount of potential.  They’ve found a way to quickly and efficiently identify strong investment managers with a complete disregard for race, religion, age, sex, nationality, or pedigree.  They’ve completely leveled the playing field.  They’ve also fostered a strong community focused on fundamental research and business valuation by scoring our investment ideas and analysis, making kaChing a great place for those just starting out to learn about investing.

Also, by controlling the trading platform, kaChing has created a system that forces investors from day one to manage their accounts as if they’re managing millions of dollars.  I’m optimistic about some small and micro-cap names, but building a position in kaChing could take days or weeks, if at all possible.  I think this makes it a little more likely that investment returns generated in kaChing will resemble the investment returns brokerage account clients will see when assets grow substantially.

The fact that real money is mirroring my portfolio hasn’t created a new set of challenges, but it has created a new set of responsibilities.  This is one of the many reasons why I appreciate the opportunities bloggers like you have given me.  I get to talk about who I am and what my strategy is.

I haven’t generated returns to date of over 80% without taking significant risks, and I plan on continuing to take those risks in the future.  I think it’s important for investors to be well aware of the risks if they’re considering opening an account with kaChing that mirrors my portfolio, and it’s also important for investors to understand the boundaries of our relationship.  kaChing is the registered investment advisor, so it is their responsibility to manage relationships with customers and make sure investors are aware of the risks they are taking.

My responsibility is mostly just to continue managing my portfolio to the best of my abilities.  But at least to some degree, I also have a responsibility to remind people that these investments are risky, and that they should consult an investment advisor before making any important financial decisions.  Especially after being up so much in a terrible year, it’s important to remind people that 80% returns are probably not sustainable.  The best investors in the world attract top analytical talent and still don’t put up numbers like that.  So this is a particularly important time for investors to be realistic about their expectations.

“Can you give us more on your trading strategies? What helps you deliver the consistent performance you’ve demonstrated at kaChing?”

For me, the key to consistency is patience.  I look for companies trading at a cheap enough valuation for me to be confident that the business will generate a 15% rate of return on my shares through dividends, share repurchases, and the growth that comes from incremental reinvestment.  However, when I don’t find companies that I believe are capable of generating significant returns, I wait patiently.  The portfolio I’ve been managing on kaChing has maintained a 20 to 50% cash balance.  This reduces my risk exposure to market-wide fluctuations, and it allows me to quickly take advantage of opportunities as they arise.  I’m comforted by the knowledge that even if all my stocks went to zero tomorrow, I would still be able to rebuild my portfolio from scratch.  But I don’t maintain a large cash position by choice.

My ideal situation is to be fully invested with maybe ten or so uncorrelated investments that I could hold as 10% positions each.  Since many of my investment ideas have already appreciated in value so much, I’m forced to sell them and continue the hunt. Right now I’m at about 35% cash, and I’m slowly building a position in BBW.  When I decided to buy it was still at $5, but in the last two weeks it has risen to about $6.50.  At most I would buy another 5%, but we’ll have to see how much more it moves away from me.

That being said, I think it’s a little early to describe my performance on kaChing as “consistent”.  Consistency can only be measured in years.  If I’m still putting up strong numbers in 2020, I’ll be able to tell you for sure what’s helped me deliver consistent performance.  Even that might be too early.

If I am able to consistently outperform, I’m guessing it will be because I read annual and quarterly reports, proxy statements, conference call transcripts, and sell-side reports until my eyeballs bleed every day.  I was only able to sacrifice two years as an unpaid intern because I find the market to be endlessly fascinating.  For the first year, I felt like every question I found the answers to raised three more questions.  I’m at the point now where every two questions answered only raise one new question.

I still have a lot to learn.  With financial markets facing so much uncertainty, I think we’re in for a very exciting decade.  I have a lot of work to do!

“That’s certainly a great point. I couldn’t agree more.  So speaking of learning, what are some of the resources you find valuable and utilize for your learning?  Websites? Companies? People?”

Starting out, I would say the first two levels of CFA materials were extremely valuable to me.  That’s probably the quickest way to get on your feet in terms of understanding common valuation techniques, and I still use the textbooks all the time as a reference.  I actually signed up for level III as soon as I could last year because I was eager to read the books.  However, I ended up throwing them out before January and not sitting for the test.  It was all about market efficiency, beta, and other junk I have no practical use for. If I had shown my coworkers what I was learning, they would have (justifiably) laughed at me.  So until I see some tangible evidence that having a CFA will help me, I really just can’t stomach the level III material.  I’ll reconsider when I stop being labeled as overqualified on job interviews.

Websites?

sumzero.com – A great place for analysts to post research, rate each other’s work, and talk about ideas.  It’s educational, good for networking, and I get a lot of great investment ideas there.

gettextbooks.com – They aggregate price data from all the major online booksellers, and email users when the price of a book I want falls below a threshold.  So I’ve been maintaining a wish list there for about two years, and it funnels me a steady supply of great books at great prices.

I avoid websites like fool.com with the terribly superficial garbage they produce that’s clearly designed for search engine optimization.  We have a natural bias to seek information that confirms what we already believe.  Sites like fool.com play to that weakness by randomly saying good and bad things about every company without any depth to the analysis, and I’m guessing that causes people to be overconfident and to make terrible short-term trades.  I designed my blog to be the exact opposite of fool.com.

“Can you share some of your good and bad trades? Given the new age of transparency, I would love to know more about your past trades.”

I watch CNBC for about 20 minutes in the morning while I eat breakfast.  I see that commercial for Jim Cramer in which he says something like “Oversized dividends can be a big RED FLAG! It’s a reason to worry and not to feel safe, and that means it’s time to SELL SELL SELL.”

Well, earlier in the year, I saw that International Paper (IP) had an unsustainable trailing dividend yield of over 15%, and I couldn’t resist buying it.  Good thing I did because it tripled in just a few months.  If a company is consistently paying dividends for years and all of a sudden can’t, it’s probably not a long-term problem with the business but a short-term problem with the environment. So I focused my research on International Paper’s default risk, decided it wasn’t terribly significant, and bought shares.  Time was on my side.  However in this case, alternative fuel tax credits came to the rescue and boosted share prices industrywide.

I haven’t really had any disastrously terrible trades yet, but I know they’re right around the corner.  I subscribe to the Ralph Vince optimal-f theory of portfolio management, which I expect will lead to a higher long-term rate of return but greater drawdown.  A big position for me right now is FNM, and I’m fully aware of the possibility that shares will end up worthless.  I’ve more than doubled my money on it.  I’ve pulled out my initial investment, and I’m still embarrassed to talk about holding it.

I’m guessing that my natural fear/disgust is part of the reason why FNM is so cheap right now.  What it boils down to is that if it goes to zero, it would have been obvious.  If it goes to $10, it will be for some reason no one today could have foreseen.  So there’s a huge social liability to holding shares.  I don’t want to look like a fool.  However, the underlying business has been tremendously profitable over the past 20 years (no one remembers that Jim Collins wrote about it in Good to Great).  FNM is an important piece of our economy, and its fate rests entirely in the hands of our government.

Our government wants its money back.  It doesn’t want to control FNM/FRE.  Furthermore, the government has made it extremely difficult for these companies to actually go bankrupt, and it has received massive campaign contributions from these companies in the past.  Lastly, the government is partly to blame for the mess by mandating FNM/FRE to make home loans available to those who otherwise might not be able to afford them.  Therefore, there are enough positive scenarios to believe that the upside far outweighs the risk.  15% of my kaChing portfolio is in FNM right now, and an even greater percentage of my real money is in it.  People probably think I can’t sleep at night with so much FNM, but the truth is I couldn’t sleep at night until I bought shares.

“Thanks for your time Jeff.  Looking forward to seeing your progress.”

Hey, thanks for taking an interest in my work.  I appreciate the introduction, and hopefully there will be good reason to probe me further next year!