New BUY Signals!! F*ck Chicken Little…

We’ve reached a new cluster of buy market signals. Of course, indicators aren’t an exact science BUT the more signals that occur together the stronger the confirmation. This market could definitely go down more (market timing is a fool’s errand). We’re just looking for a general trend indication and right now signals are leaning to opportunity, NOT A CHANCE TO FREAK OUT AND SELL.

For those with no background in technical indicators, we’ll give you the shortest explanations possible… If this is way over your head, totally understand. You’re just going to have to trust that we know what we’re talking about.

The McClellan Oscillator is an indicator that measures overall market movement. Any reading below -200 means the market is oversold. Meaning the market is close to running out of sellers and almost only buyers will be left soon. Right now, we’re sitting around -240.

The Put/Call ratio measures how many bets options traders are making on the market going down vs up. Right now, the ratio is at 1.24. The average usually hovers around .9. That means right now there are 24% more bearish bets than. bullish. You’ll notice that the last 2 times the indicator was this high were late May and late December. Screaming buy opportunities.

This next chart has 2 VIX (volatility index) signals. The Bollinger Band signal and the CVR3 cluster. For the Bollinger bands we just want to see that the close comes back into the upper band after it’s spent a few days outside. For CVR3, we want to see: the close lower than the open for the day, the close higher than the 10 day moving average, and the PPO close above 10 (right now it’s at 15)

Keep an eye and you might want to review your watch lists. Do NOT get shaken out of your positions unless you hit a trailing stop you had previously set.

The NSFW 401(k) Cheat Guide

For the sake of not dying of boredom, NSFW officially recommends just skipping to the questions you actually care about first. This stuff is not fun. The financial industry has ensured that it sounds as boring and complicated as possible. It’s a lot easier to take advantage of people when they’re asleep. Edited: NSFW has removed a comment referencing Bill Cosby here as it is already a dated reference and not that funny.

The Basics

What is a 401(k) and why is it called that?
It’s a retirement plan set up by employers that lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn later (ideally in retirement). The name 401K comes from the part of the tax code that created these plans. The account your plan uses is made specifically to invest for your retirement and nothing else. Another company, called a plan administrator, takes care of and manages the account for both you and your employer.

My company says they will “match contributions”? What the hell are they talking about?
A contribution is the money you put into your retirement plan. The match means your employer will put in the same amount of money that you put in. You put in $100 a month, they will also put in $100. That means you now have $200 to invest with. Generally, an employer will have a maximum amount they will match (around 3-5% a month or per check on average).

What’s the catch? Why would they do that?
The catch is called “vesting”. It means that even though they put that money in there for you, you don’t usually get to keep it for quite some time. Nearly all retirement plans have a vesting schedule. Vesting schedules tell you how long you have to stay with the company to keep the money they “gave” you. Companies love to talk about the employer match because it sounds like a great benefit (and it can be), but most will never even say the word vesting. It’s quite common for companies nowadays to require people to stay with the company for 5 or more years before they can keep 100% of their employer matches. Any gains that you made from investing the employer’s contribution will ALSO be taken away from you if you leave early. Sneaky Bastards.

How much can you put in to the plan/account per year?
2018 limit = up to $18,500
2019 limit= up to $19,000
Note that these maximums are set by the IRS, not your employer.

Can I invest in anything I want or do I have to choose from the funds specified in the plan?
Just the stuff in the plan. There will generally be a list of 20 or less mutual funds.

How to Willingly Give Wall Street Your Money While Bitching About Wall Street Taking Your Money

(aka Hidden Fees you are probably already paying)

“96% of people know how much they pay each month for streaming media services like Netflix. Just 27% know how much they’re paying in fees on their 401(k) accounts.”

Most people, if they invest at work at all, don’t bother looking at the cost of their retirement plan. Unfortunately, this can really suck away the returns that you make on your money over the long run. When people see a fee like .25% (for clarity that is just a quarter of one percent) they don’t give a second thought, because they’re still not completely comfortable with the idea of compound interest. The chart below can show you how much even a quarter of a percent can affect an investment return over time.

Source: Investor.gov

Notice that the difference between the blue line and the green line is only .75% in fees. Not even 1%. In 30 years it shaved off around $30,000 from your retirement. So pay attention…

Types of Fees:

Plan Administration Fee = Money you pay the 401k plan administrator for managing your retirement plan. Generally there is no way around this fee while you’re with your employer, but it’s something to be aware of. This is also one of the many reasons why you don’t want to leave your 401k with an employer custodian after you’ve left.

Expense Ratio = The management and operations fees of the fund are generally grouped together into this number. It will be given as a percentage that you will pay each year you have your money in the fund.

12B-1 Fee = Money you pay the fund to use for trading commisions at the brokerage and for advertising to other investors. This way you get to pay for marketing, not them. Not even kidding. You probably wouldn’t give them money if they called it Advertising Fee though. 12B-1 sounds fancy and people don’t ask alot of questions. This fee should be already included in the expense ratio.

Load = A sales charge. A load is a fee you pay when putting money into or taking out of a mutual fund. For example, a front-load fee of 1% on the fund means that before they even invest your money, you pay them 1% of all the money you’re giving them to invest. Pretty sweet deal, huh? If you pay the fee when taking the money back out of the fund, that’s called a back-load.

Redemption Fee = Money you pay for taking your money out of a fund too quickly. For example let’s say a mutual fund has a redemption fee for withdrawals before 30 days. You put your money into it. 3 weeks later, you decide you think another fund would be a better investment. So you sell out of that mutual fund. You get to pay them for selling out before 30 days have passed.

What is a reasonable amount I can expect to pay in fees?
If you work for a large company, expect to pay about 1-2% a year with all fees included. Aim for 1% or Less (expense ratio + plan administration). Smaller companies with retirement plans generally run higher in fees (2-3%+). Aim for not paying more than 2% tops. Generally, when people are even made aware of the fees they are paying, they will make better decisions for fund choices. If a fund commands a higher fee, you may want to make damn sure that it has a long history of outperforming all other choices available.

Funds with higher fees are generally actively managed vs just indexed. The ironic thing is, the cheaper indexed funds usually outperform the stock picking managers (about 90% of the time). So just remember, 90% of the time, you’re best off just picking the index fund(s).

If you want a short cut in finding out how much money you’re giving away FINRA (financial regulator) has a free tool for you.

Fund Fee Analyzer
*Can be used for Mutual Funds, CEF’s, ETF’s, etc.

WHAT THE F*CK?

(A translation guide for that stupid packet they gave you at work)

Allocation
How your money is split up and used to buy stocks, bonds, or funds.

Equity (equities)
Stocks.

Fixed-Income
Bonds.

Balanced
Your money is put into a mix of different types of stocks and bonds.

Aggressive
Your account value is going to swing up and down more, but you have the potential to make more money in the long run.

Conservative
Your account value will be relatively stable, but you probably won’t make as much money in the long run.

Moderate
In-between conservative and aggressive. You won’t make the huge gains when the market goes up, but you also won’t lose as much if the market goes down.

Index (indexed)
The fund doesn’t have somebody making decisions on what to buy and sell. The value of the fund tries to match the growth/value of a specific market or theme. Example, a fund that is indexed to the Dow Jones means you won’t have to buy every company in the Dow Jones. The fund owns all those companies and you will get the cumulative gains and losses of everybody. These funds are (as a rule of thumb) cheaper, better options than actively managed funds.

Global
At least some of your money will buy stocks or bonds from countries other than the US.

Developed
The big European countries. Think Germany, France, Switzerland, etc.

Emerging
Money is at least partially invested in the up and coming countries that aren’t typically considered as well off economically as the US or Europe. Think China, India, Brazil, Russia, etc.

Target Fund (aka TR 2050 or whatever number)
The 4 digit number is the year you expect to retire. A target fund means you pay a manager to allocate your money between stocks and bonds and reallocate regularly in the hopes that by the time you retire they will have invested your money way better than you could have. Hot tip: these funds are garbage and work superbly for Wall Street to bleed money from people who are too lazy to make a few simple, informed decisions.

Quote Source: TD Ameritrade 2018 Survey of 1000 active investors. The percentage of the general population who know about 401(k) fees is far less than 27%.

Backdoor Investing: A Safer Way to Speculate

Unless you’ve been hiding under a rock, you’ve likely heard about the rapidly expanding cannabis industry. It seems nearly every major website has been posting about either cannabis regulation, a new IPO, or some new product. Well, we’ve been getting a lot of questions about which cannabis stocks to invest in and our answer may surprise you.

While there are cannabis stocks we recommend investing in directly, we’re going to show you a quick and easy way to buy these companies in a much safer way. Simply put, you don’t buy the cannabis stocks… you buy the stocks of the companies that buy the risky stocks. You’ve probably seen at least one or two articles about companies investing in the cannabis industry. Cigarette companies, liquor companies, even a few financial companies (if you’ve got a good eye). Here’s the thing… Those big bastards have WAY more investment savvy than you do. They’ve got analysts who do the real work. There’s no reason for you to have to dig as much when a multi-billion dollar company has already done it.

Example:

Recently, Constellation Brands (STZ, the booze company behind Corona and Modelo beer, Svedka vodka, etc ) made a multi-billion dollar bet on the cannabis company Canopy Growth (CGC). Who do you think has a better idea on a good bet for a weed stock? You or a $42 billion company booze company. So what do you do with that? You can buy STZ if you want to buy CGC. You are getting a huge name brand company as well as a stake in a cannabis company trying to find its footing. If Canopy growth goes bust, you’ve only lost a small amount. If you buy Constellation, you’re getting world-class liquor and beer brands that already pay a dividend as WELL as a portion of Canopy growth. When you’re buying in a retirement account and don’t have to many years until retirement, it may not be a good bet to buy something without a track record (ie cannabis industry stocks). But the big guys who are speculating probably aren’t going to get even close to busting out like some new stock of the day.

So how do you know where to find backdoor stocks? Simple.

Go to Whalewisdom.com. This site shows you 13-F filings (ie who owns what of the big boys on Wall Street)
Enter in the symbol of the stock you want to buy that may be a bit risky or new.
In this case, we’ll just use Canopy Growth (CGC)
Sort the list by % of portfolio.
Big company investments will be at the top of the list. You see here that the 2 biggest holders (whose portfolios are 100% invested in Canopy)
Now we Google who the hell those companies are. A simple search shows that BOTH holding companies are owned by Constellation brands. The first search of CBG Holdings LLC has the first result showing this ownership.
The only thing left to do now is decide if you like Constellation Brands, which is about 4x as big as CGC and already has cemented brands and a helluva distribution network

THAT’S IT! Try it with some new companies and see if you can find some bigger, safer ways to use to backdoor invest in new ideas. Weed stocks, Chinese stocks, new tech stocks.

PEAD: About As Close To A Free Lunch As The Market Will Give You

PEAD is post-earnings announcement drift. It’s a “phenomenon” discovered by in the 1960’s when some guys noticed that after earnings releases the stock nearly always tends to continue drifting in the direction that the earnings tilted. A stock has surprisingly good earnings and jumps on the news, it will probably keep going up for the next few weeks. Same with posting a loss, it will likely continue to drop in price not just the day after earnings, but for the next few weeks.

For example, Kraft Heinz is being slaughtered this morning. As we write, the stock is down 27.5%. Long story short, it because of a trifecta of bad news. Quarterly earnings were massively disappointing, they cut their dividend by 25% (one of the main reasons people buy huge, old companies like this is for the dividend), and they also disclosed that they are being investigated by the SEC for some possible funny business. Whether it’s true or not doesn’t matter. What matters is that the market didn’t like it. So now we have a stock down a massive amount and while this is a VERY overstated example, we can expect with nearly 100% certainty that the stock will continue to fall for a while. It will drift in the direction that it moved initially. Buying right after a huge drop like this is 100% a terrible idea. It may bounce up a bit because of the severity of today’s drop, but that’s only a band-aid on a bullet wound. It’s a pretty damn safe bet to assume you can short the stock or buy puts and probably turn a profit (assuming you don’t overpay for your option).

Conversely, you have a stock like ROKU which posted earnings and revenue higher than Wall Street expected. The stock is up over 20%, a massive over-reaction to an earnings beat. It doesn’t matter though, the street is excited. We can expect Roku to continue in the upward direction for a while. OR at the very least it will likely outperform the broad market.

So that’s all that nerdy acronym means… PEAD = if the earnings announcement was good, the stock will continue moving up for a while. If earnings sucked, it won’t just move down the day after the announcement, it will continue down for the short-term.

Further reading for the financial nerd types:

Post-Earnings Announcement Effect (Quantpedia)

Surprising Facts on Post-Earnings Announcement Drift (AlphaArchitect)
note: read anything Alpha puts out. Their work is golden.

Drift or Jump: What Drives Post-Earnings Announcement Stock Returns? (SSRN)

Post-earnings-announcement-drift and 52-week high: Evidence from Korea (ScienceDirect)

Value Size!! Becoming a Better Investor By Grocery Shopping

There are two ways to value things that come in multiples. By multiples I mean things that contain a number of ounces, liters, gallons, shares of a stock, etc. The first and most common way is to look at absolute price. Perfect example from a recent trip to the grocery store. A 12 oz bottle of a cleanser costs $10.99. A brightly labeled “Value Size!” bottle has 16 oz and costs 14.99. Well, the value size is… obviously supposed to be a good value. You buy the $14.99 bottle.

You done gone and f*cked up.

The second way to value things is by unit cost. The math here is simple. Divide $10.99 by 12 (ounces). The result means 1 oz costs apx .92 cents. So if the other bottle of 16 oz should obviously cost less than .92 cents per oz. Right? Easy enough. Well, 16 x .92 cents = 14.72. Hold up… that’s .27 cents cheaper than the 14.99 price.

You’ve now 1. bought more of a product and 2. paid a higher price. Pretty sweet deal for the manufacturer and the retailer.

You may say “well, it’s only .27 cents, who gives a sh*t” and that’s fair. But if you start multiplying these price differences up in the hundreds and thousands of dollars it makes a bit more of difference. Especially if you keep making the same stupid mistake.

It’s tiring to hear over and over again that the share price of a stock is too high so it’s too expensive. One share of NVR (a phenomenal homebuilder stock) is $2,639.98. A share of AMD (a semi-conductor stock thats massively popular with gamers) is $24.17. New investors look at the 2 stocks and say that obviously AMD is a hell of a lot cheaper than NVR. Well, AMD is actually over 5x times more expensive…

In this example, we’re going to use the price/earnings (p/e ratio) that we discussed in our last lesson. Remember, Price to Earnings is simply the price you pay for a stock divided by the earnings your share makes in a year. In the last year (TTM or trailing twelve months) NVR has earned $195.31 per share. God d*mn…nice. AMD, the “cheap” stock, has earned .32 cents per share.

NVR’s Price/Earnings (p/e) is then $2639.98 (share price) divided by $195.31 (earnings)
which equals a p/e ratio of 13.26.

AMD’s p/e is $24.17 / .32 cents, which equals 74.61.

What would you rather pay 13.26 or 74.61? It’s not dollars, it’s a relative valuation, but it works the same way. Which leads to the conclusion that…

Just because the price is low, does NOT mean that something is cheap. Just because the price is high, does not mean it’s expensive.

If you want to get better at valuing things quickly, the grocery store already has a perfect way built in with many products. Most people never look at this, but it’s on nearly every label. Unit cost is written directly on the label. Think of unit cost as the p/e ratio in stocks.

sticker price for blinker fluid — Graphic from All Day Organics

From now on you need to start looking at that unit price label before making your decisions. In the above example, the bulk buy is truly a good deal. The unit price for the 62 oz bottle is less than half the true cost of the 8 oz bottle. In reality though, it can be about a 50/50 chance depending on the store. One thing to note is that if something is on sale you want to look at the adjusted unit price written on the sale label and not the white (typically) regular price label.

Start doing this on a regular basis and you will quickly and completely change how you think about the prices of things. It’s an easy one step closer to becoming a better investor.

NOTE: Arm & Hammer Baking Soda is made by Church and Dwight (CHD stock symbol). CHD has returned an annualized 18%+ since 1995… May be worth a look when it’s not too expensive. Hint Hint

Investing 101: Should Walter White Buy The Local Car Wash Company Or The Laser Tag Company?

Comparative valuation sounds boring, but when you understand the premise you’ll realize it’s easy as hell. The problem you run into when trying to pick stocks is that you’re comparing apples and oranges all to often. Unfortunately, most newbies make 1 of 2 mistakes. The first is looking at the share price of a stock and deciding “well, that stock is way overpriced”. You need to realize that share price is only a small part of the equation. If you don’t know how many shares a company has, then you don’t know how much of the piece of pie you get when you’re buying a share. The other mistake is not having a method of comparing 2 companies like Apple and Walmart. Those 2 companies are NOTHING alike obviously, and without a way to compare them most people usually then revert to which has a cheaper share price. So how do you figure out which one is a better deal. THIS is where we get into comparative valuation. This one won’t hurt a bit.

Walter White* is laundering his meth money. He needs to find a company in that looks like a legitimate investment. Well, he’s a science teacher so he’s not just going to buy any crappy company out there. People will know he’s not buying a good investment. He’s narrowed it down to either buy Saul’s laser tag company suggestion or the car wash he used to work at. These two companies are nothing alike, so how the hell is he going to figure out which is a better investment. These are the 2 most common ways to compare companies…

Price/Earnings

The laser tag company is $500,000. It earns $75,000 a year. Earnings are sales/revenue for the last year minus all the costs of operating the company. It’s the money the company gets to keep. So the price/earnings ratio for the laser tag company is $500K divided by $75K. We get a P/E of 6.66.

The car wash is $800,000. It earns $160,000 a year. So it has a P/E of 5 (800K/160K)

So somebody new to investment will typically look at the two and say “obviously, 500K is the better deal”. But now we have a way to compare the two. Laser tag has a P/E of 6.66 vs the cash wash at P/E 5. When buying an investment you typically want to buy the LOWER P/E between two or more investments. In this case, the car wash (while more expensive in dollar terms) is the better deal. It earns more in relation to the price.

Price/Sales

The next most common way to value companies is simply price vs sales. The only difference here is that instead of bothering comparing the money the company gets to keep, you just compare who sells more in relation to their price. The car wash is $800,000, but takes in $200,000 in sales every year. It has a price/sales ratio of 4 (800K/200K = P/S 4). Laser tag takes in $130,000 in sales every year. So it’s P/S is 3.85 (500K/130k = 3.85. Obviously, 3.85 is less than 4, so if you were valuing the companies just on sales, the laser tag company would be a better deal in this case.

Why Walter would value based on P/E vs P/S gets a little bit more advanced. If he compares the two based on P/E, the car wash is a better choice. If he compares the two based on P/S, the laser tag company is a better choice. As time goes on, you will figure out which is typically the best way to compare companies. In the beginning, we recommend just looking at Price/Earnings P/E.

A few of you are probably saying “that’s all well and good, but how do you compare companies when you’re buying stocks that have shares”. Simple, a company has a certain number of shares at any given point. So to compare the stocks vs buying a whole company you would just divide price of the overall company (it will be labeled as market cap) by how many shares are available. The good news is the price AND the earnings or sales will be divided by the same number (the number of shares doesn’t change). So NOTHING is different in finding the P/E or P/S with stocks/shares.

The good news is that looking at at the P/E of a company is so common that any stock site that you go to will have it already listed somewhere. Usually on the stocks main page or under a page called “valuation ratios”. Here’s an example on Yahoo Finance:

By the way the (TTM) means trailing twelve months. Meaning the number is based on the last year worth of earnings.

So that’s it… you’re done. You can go now…

*He’s from Breaking Bad. Why are you reading this instead of watching it?

“Our Newsletter’s Most Recent Returns: 118%, 546%, 1,537%!!!!” Sneaky, Sneaky…

If you’ve been learning about investing for any amount of time, you’ve probably received some emails or Facebook ads similar to this. It’s an old marketing ploy used by tons of options and stock newsletters* Are those types of returns possible? Yes, but not in the way you think…

Here’s the catch, most often when they talk about returns they are secretly referring to what are called annualized returns. Essentially all that means is that a pick of theirs may do very well over a period of days or weeks. They then estimate how much of a return you would get if they kept that rate of return up for an entire year. On top of this first catch, people tend not to notice that the recommendation “ideally” only uses a small percentage of the money (capital) in their account. They may not want you to spend any more than 2-5% of your money on any one stock, fund, option, etc.

Let’s Learn How To Lie With Numbers!!!

So your newsletter recommends an option to buy and you have $100,000 in an account.
(DO NOT be embarrassed if you have no way near this. This is just a round number)

The newsletter recommends an option to buy. It also recommends you not use more than 1% of your capital for this one trade.

That means you should spend more than 1% of your account on any one option recommendation. To make this easy, you spend all $1,000.

The option does very well and in 2 weeks has gone up 56%. Totally reasonable expectation with a decent options play. Now to lock in that options trade they recommend closing out the trade. So you’ve made 56% in 14 days. Super.

Here’s where the sneaky part comes in. 2 weeks is 14 days (obviously) and in finance we never use 365 days to estimate a year, we use 360.

So in 14 days we’re up 56%. As a decimal that is .56 (56% divided by 100 to get the decimal).

So how much of a return is that per day? We divide .56 by 14 = .04. The option made 4% per day. Not bad at all.

Now if we want to find out the annualized return we multiply the daily return rate by 360 (one financial year) So .04 x 360 = 14.4. Now multiply it by 100 to get that number as a percentage and we get 1,440%!!!!!

They just made you 1,440% (annualized) on just ONE recommendation!!!

Oh wait, we forgot that was only on $1,000… and really you only made 56% on that option. That’s $560…

Now $560 is nothing to sneeze at, obviously. But remember you have $100,000 in your account. $560 is .56% which the stock market may go up or down in a single day…

That newsletter made you .56% on your account, not 1,440%. Bit less impressive, huh?

This is how investment marketing works. They’re not REALLY lying, but they kinda are. They’re lying with numbers people don’t understand, not with words people DO understand. You just have to know how the math works and know where to find the disclosures. Next time you see an ad promising returns like this, ask yourself what is more realistic .56% or 1,440%. Good rule of thumb: if the primary marketing tool of an investment is the promise of a specific rate of return, run for the hills. Beware of wolves in newsletter’s clothing.

*For those who don’t know, investment newsletters offer you stock/funds/option picks to buy or sell with every issue (generally monthly) There ARE some fantastic newsletters out there, but they are few and far between. Prices range from about $40 up to $5,000+ for any one newsletter. Combo deals of multiple newsletters can reach over $25,000+.