Category Archives: Investments

Sell a Stock When The Story Changes

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If you happen to read some of my past articles, you know that I’m a “buy and hold” and “dollar cost averaging” kind of guy!

When I buy a stock, I usually buy it for the long turn (except in my Roth IRA, where I do some small active trading in down markets  and use it as a dividend shield).  Occasionally something happens to one of my stocks that requires that I sell the stock since the story has changed.  Such was the case yesterday.

I sold a stock that has increased in value by around 10 fold!  It was a great stock and had a wonderful business model where it’s at (in China).  In fact the company is so good that it practically has a monopoly in it’s area of expertise.  It’s main competitor (Google) exited the environment leaving all the spoils to this company.  Yes, the company is Baidu (ticket BIDU).  I’ve held this company for a few years and it has been the equivalent of a rockstar among stocks.

So why am I selling it now?  China!

China is an incredible country and there is a lot of great growth happening over there with respect to their economy.  Baidu has been a shining star, even in a fast growing country like China.

So again, why am I selling?

The state media is starting to sling mud at Baidu by stating that Baidu is allowing bogus drug companies to sell fake drugs on it’s site and claiming that the auction bidding process for Ads is rigged. In the US, this would not be room for alarm and wouldn’t bother me much since the company would most likely just get fined.  But in China, they can do whatever they want, whenever they want.  They have no restrictions.  If they want to shut down Baidu tomorrow, they would just walk in to Baidu and shut it down.  If they wanted to take over the company and claim it’s now a state company, they can do that too.  China actually has no limits as to what they could do.

So the real question is, has Baidu’s story changed?

  • Well, the last identification of problems by the state may change Baidu’s business model.  if this happens, then there is a chance that it might not be as profitable.  This would destroy the stocks growth rate and stock valuation.
  • Potential loss of the drug Ads could have an impact on Baidu’s profits too.
  • Changing the business model (if this is done again), may prove less profitable than the prior model.
  • If China nationalized the company, many would be out of lots of money.

The reasons above dances in my mind, but mostly it’s investor sentiment that worries me.  Others may be thinking about the small subset of problems points that I mentioned above and start to sell even more that what has happened already.

Depending on what goes down and how brave I feel, I might try to buy some more shares if the price falls far enough.

So yes, because of uncertainty, I’m out of one of my favorite stocks.

What would you have done?  Do you think I’m panicking too quickly?

Time will tell,

MR

 

 

 

How I Take the Bite Out of a Downward Stock Market Trend

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Overall, I’m a dollar-cost averaging investor so I do receive some benefit in my account when the market has dips.

However, when the market has days where it dips 600 points in the DOW in one day, I still feel the pain.  Or at least I did in the past.

These days as long as the stocks that I own have value, I just let them ride.  It’s never good and quite disheartening to cash out at the bottom of a deep dip in the stock market, only to see it rebound the next day.  When I was younger I would occasionally make this error, but now I just leave the stocks I have invested in the market go because the stocks that bought have a good story and financial figures.

Still, it’s a bit painful to watch the value of your portfolio drop, so I created a little distraction to take some of the pain out of a downturn in the market.

Here is what I do:

  1. Keep a small position in cash that I use for play money (not much, just a few thousand)
  2. I divide the money into 2 or 3 parts.
  3. I follow and invest in a favorite stock that I know very well.
  4. I buy the stock as long as the market falls (and the stock falls in price too).
  5. I do the purchase of the stock in a Roth IRA, that way I avoid the capital gains tax.
  6. If the stock market falls by another large percentage, buy more with the second amount.
  7. If I have a third amount, and the market continues to drop, I buy with the last amount.
  8. Next I wait for the market to recover, knowing that I got great low positions on my purchases of my favorite stock.

This process is what I use to take the bite out of a down market.  It’s more of a game than a real investment strategy, but at least I’m not as upset when the market is in a downward spiral.

There you have it,

MR

Why You Can Buy a House in Detroit With a Single Paycheck

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Looking for a house but don’t have a lot of money to spend?

Well, you can find a house in Detroit for less than most people pay for their first car.  According to CNN Money, there are around 709 houses listed for sale in Detroit for under $3,000.  Detroit’s not alone in the dirt cheap housing market, however, as Flint, Cleveland, and Indianapolis all have at least 18 listings for houses around $3,000.

Small House

Cousin’s Dream House

Seems like the deal of a lifetime right?

Well, there are some rather disturbing factors contributing to low housing prices in Detroit, and it’s important to know what you’re getting yourself into.  This is the same with many products you can find for sale in the marketplace.  Price is far from everything, and you very seldom need a finance degree to identify when some things are too good to be true. So, what factors are contributing to such a horrible housing market in the Detroit, Michigan area?

The Problem of Bank Foreclosures

In October 2010, Fox News reported that 288,345 foreclosures occurred in the United States from July to September of that year.  By the end of 2010, Reuters reported that 1.05 million properties had been foreclosed around the country that year.  According to Heather Fernandez of Trulia.com, this massive foreclosure rate doesn’t just hurt the borrowers, but the lenders as well.  According to Fernandez, “Foreclosures have turned banks into property management companies.  It’s often cheaper for them to give these homes away rather than try to get market value for them.

High property taxes in Michigan contribute to lenders’ problems holding foreclosed properties. The average homeowner pays just over $3,500 a year in property taxes within Detroit.  This means that lenders with many foreclosed properties have to pay thousands of dollars until they can sell the properties – something that may never happen.  So, houses are listed for as little as $500, most of which goes directly to the realtor as commission after the sale.  The $3,500 less in taxes every year and whatever the borrower originally paid on the mortgage is all that the lender profits.  You can check millage rates by county at the Michigan Department of Treasury website.

Increasing Crime Rate

Higher population densities naturally translate to high crime rates, but Detroit has a crime per square mile rate more than 12 times the national and state average – with 519 crimes committed every year per square mile.  With an average of 72,039 crimes committed in Detroit every year (54,057 as property crimes and 17,982 as violent crimes), Detroit is ranked as being a safer place to live than only 4% of other cities in the United States, according to Neighborhood Scout.com.

It’s difficult to make a direct correlation between increasing crime rates in a city and decreasing property values, but there have been numerous studies on the topic.  A study performed by Lynch and Rasmussen in 1995 found that housing values in a high crime area fell as much as 40%, with one house declining from $94,000 to $57,000.  But these results have not always been consistent.  As early as 1980, a study performed by Naroff found that a 1% increase in crime rate in a neighborhood caused property values to increase by 1.7%, likely due to increased taxes to pay for more police in the area.

Fixer Uppers Flooding the Market

One of the most important reasons you should be careful before investing in a low cost house is that most houses on the market for under $3,000 in Detroit are serious fixer-upper cases.  Many houses at this price level are missing key elements, like their water pipes, fixtures, or electrical wiring.  Various damage to the interior and exterior can cost a buyer up to $20,000 in repairs before the property is even up to code.  In higher crime areas, some houses have been stripped during burglaries, and are surrounded by other similarly destroyed homes.  There is good news, however! Programs such as the U.S. Department of Housing and Urban Development offer new homeowners funding to help offset the cost of bringing such low cost properties up to code.  FHA-approved lenders can even offer loans to pay for the purchase price of the house, as well as the rehabilitation costs – which encourages banks to keep housing prices low in the hopes of securing such a loan.

So, it’s important to be careful with any purchase that seems like a ridiculous bargain, especially in housing.  Areas like Detroit might recover over time, but remain places commonly associated with high crime rates, low property values, and bitter winters – not exactly the place to build a dream home.  If you decide to take a chance at a fixer upper in Detroit, be sure to ask your realtor questions about the crime rate in the neighborhood, quality of the school district, and the property itself.  Some houses are simply cheap because of the high foreclosure rate, and there is little else wrong with them.  But be sure to do your research before investing in them.

The guest post today was written by Andy Wallner!  I found this article particularly interesting because I thought that such an investment sounds interesting and it’s good to get a perspective from someone closer to the local area!

Andy Wallner is a freelance writer that is interested in online and offline marketing information. In his free time, Andy enjoys kayaking, playing trombone in a local jazz band, and learning CSS.

Thanks Andy!  Very interesting article!

MR

3 Videos On Investing, Including Warren Buffett’s Technique

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I decided to include these great videos on how the stock market works or how investors trade on the market.

I came across this incredible entertaining, but old video on how the stock market works.  It’s a cartoon, but has a fun, warm feeling to it.  It’s from the 1960s, and it’s very interesting to see how it was back then versus today.  I think you’ll enjoy it, check it out:

Now as a contrast, consider the flow of this next video where a day trader has a good trading day. It’s amazing how fast the market moves now, what would have taken hours and perhaps days in the 60s is now performed almost instantly.  That’s the power of technology used to make a liquid market!

And finally a video on the most successful investor of the present times, Warren Buffett!  I think as you watch this, you’ll realize that liquidity, while important to Buffett, doesn’t really have a bearing on when he buys or sells.

Surprisingly, Mr Buffett seem more in line with the 60s video than that of the tech savvy day trader video!

Actually, it’s not that surprising since Warren Buffett doesn’t even use a computer to make trades.  From what I read, Warren uses his computer mainly to play an online bridge card game.

In conclusion, I think for the best financial advice it probably would be best to find a few investing sources and experiment with them until you find one that works best for you.

I hope you enjoyed the three different but all interesting videos!  I know I did!

-MR

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