The Position Makers

i’ve been wondering if US shareholders of Nintendo (NTDOY.pk) should seek Nintendo management to list the company on a reputable exchange.

as a benefit to shareholders:

1. increased liquidity — being listed on the pink sheets means that many brokerage firms have limited access to the markets making it difficult to execute buy/sell orders. by listing on a real exchange, [potential] shareholders would have access to more liquidity
2. increased transparency — because the market is not nearly as liquid as it could be, most tracking tools don’t maintain accurate information such as dividends, volume, etc. i’m not a purely technical trader/investor but i do like to look at historical data when increasing, entering or exiting a position. i have no intention of selling my nintendo shares any time soon but i would really like to have better access to information, information that brokerage firms (such as etrade) would provide were nintendo listed on the NYSE or NASDAQ.
3. higher stock price — because many institutional investors are constrained by the type of listings they’re allowed to invest in, not being listed on an exchange (in the US), prevents many firms from purchasing what is a growth company. even simple index funds are unable to purchase NTDOY because it’s simply not included in an index. the “supply of buyers” in the US (and europe) is limited to individuals (and some hedge funds), suppressing what could (and should be) a higher stock price. just to note, many of the institutional buyers (mutual funds, retirement funds, etc) are also limited by the number of international holdings eligible for purchase. in many cases, the company is limited to 2% or less of their total funds being invested in foreign listings, which Nintendo maintains under the ticker 7974 in japan.
4. increased trading options — meaning options could be sold. one of my primary investment models, as outlined here, is to sell short covered calls on my equity positions. this enables me to receive a higher rate of return even in a stagnant or side-to-side market. heck, even in this “bear” market where gains are quickly eroding. in fact the bear market may be the best condition for me to trade in since i’m able to sell the options short on up days and ride the contract down to zero only to resell the next month. providing more choices, i.e. options, to investors is not a bad thing.

so, what do you think? i’m obviously for it. are there any blaring problems that i should consider?

so i had the unique pleasure of being contacted recently via gmail through the finance.google.com forums.

the person who contacted me was curious about options and how i use them. i’m not sure if there was a single post that caught his eye or a series–forgot to ask. probably for the best.

i spent the first few minutes of our chat on gchat trying to delve into his current trading/investment habits. what was most clear to me was a lack of a plan–not on paper or in his mind. this is actually pretty normal i think. i don’t think i had a plan for a number of years…in fact, i’ve spent the first ten or so years of my investment adventure experimenting with different techniques. as i mention on the about page, i ended up living off swing/momentum trading for quite a while. since then, i’ve come to realize more and more lately that having a plan is extremely important. without the plan, we can’t know how we want to react and handle a situation that [potentially] requires immediate attention–but in most cases doesn’t!! in my case , i was an utter fool for not having a plan. i think a plan that clearly defined my investment goals, technique, approach, paradigm, whatever-you-want-to-call-it, would have put me in a better state of mind for managing my returns. rather than being only marginally better off, i’d be way better off. what a simple way to make myself feel stupid. lol

this brings me to my first rule of investing and trading: have a plan.

the best way i know of to treat a plan seriously is to consider my business. at least for me, it helps eliminate the gitters and anxiety of the stock market. i certainly can’t control mr. market’s offers or immediate need to sell (or buy), so i simply put a plan in place that helps me to be always profitable.

before going further, it’s important that you understand what an option is and how it works; so, if you’re unfamiliar with options click over to wikipedia’s entry, maybe follow up with a bit more reading from the external references and then get back over here. once you have the basics down, you’ll want to understand my plan a bit more–even if it only helps you to understand your own plan.

now, as we all know, an option contract constitutes the right to buy [in the case of calls] and the right to sell [in the case of puts] 100 shares of an underlying stock. i’m not going to recommend anyone purchasing/selling naked options–option contracts where there’s no underlying stock supporting the contract. in those situations, the investor or trader is taking a bit of risk that the contract will expire worthless and therefore have no obligation to own the underlying stock in order to procure the shares of an exercised option contract. besides not fitting in my plan, it seems like undue risk for lop-sided returns. just mon avis.

because my goal entails developing the largest stream of income while maximizing reinvestment potential, i buy underlying shares in the company. i don’t buy 100 shares at once, unless the stock is pretty cheap ($3-$5…i’m not talking penny-stocks), so i can make sure my entry price is actually at a fair value. maybe it’s just old chart reading habits; at the same time it really just comes down to me not wanting to pay full price. that’s a relative number typically so i just slowly build up a position over a month or even quarter. i also add to existing positions in this way.

covered calls:

again, i’m trying to maximize my reinvestment potential. that means i’m going to want my money to be compounding as often as possible (i like every 30-60 days). Luckily, option contracts are expiring once a month. So, depending on the option contract price and my total share number (100 shares to 1000 shares for example), i sell 1 to 10 contracts.

i choose the price that i feel i need to make the transaction, with general pricing metrics in mind. the nice thing about option contracts is they’re based on some pretty rigid mathematical formulas, namely accounting for underlying stock value and volatility. this means there’s not much fudging of the numbers going on. the market price is actually pretty accurate in my mind for that particular day/week. this doesn’t mean i don’t get to choose the price that i’m willing to sell for. it’s just about proper timing and . (so, yeah, you can definitely time the market…it’s just all a question of what we mean by ‘time it’.)

how do i figure my price out?

simple. i just ask myself a couple of quick questions:

what return would i be willing to sell these stocks for if the option contracts are ultimately exercised?

what is the value for the risk i’m taking to sell this option contract?

depending on the volatility of the market and the long-term growth potential of the company (again in relation to the violent swings mr. market creates), i set a % return. i typically want 20% return on the stock itself and 2-5% for the option contract.

so, if my shares are taken in the 30-60 day period, i’ll make 22+%.

again, i always look at where i think the stock is going to end that period at, so i’m not selling in the money options. i’m selling out of the money but not ridiculously out of the money unless i have to extend my reinvestment horizon out. (i’m a fan of 22% returns). the reason for not tending to avoid really-out-of-the-money options is that they are worthless at that point; i’m certainly not going to give someone the right to purchase my stock. i’m a greedy bastard.

reinvestment is of course an issue. so, what happens if the shares are taken?

i’ve never seen a stock that sky-rocketed up and then didn’t come back down to earth. if someone buys my shares because of irrational exuberance, fine. i’ll just buy it off someone other schmuck after the euphoria passed and the price is back down to normal, pocketing/reinvesting the differnce. (my definition of normal of course).

let’s keep in mind that as we implement our plan, the underlying stock may keep creeping up to the point where the stock 2, 3, 6 months before was ‘way out of the money.’ that’s just great in my mind. that means i’m selling even more out of the money options for an even better return. and if the price tumbles from there, i haven’t lost anything on my original investment. sweet.

another obvious concern is that i didn’t enter the position at the right value and the underlying stock goes down even further. so long as my break-even is out of the money, i don’t see a problem with selling the option contract for that exercise price. so long as i’m confident that it won’t end in the money. again, i can also just say, “shit. i didn’t do my homework correctly. i have to sell a LEAP.”

some of my companies are dividend payers, others aren’t. dividends are great because it’s just gravy for the reinvestment program or for starting new positions.

i think of it like this:

options are the monthly dividend and some of the companies pay me quarterly bonuses for good behavior.

i am in the process of getting ready for a trip to africa, so i may have left a step out or glossed over an important/debatable point. leave your comments and i will definitely discuss when i get back. and just for the record, i won’t even dream to think or imply that i’m the first to do this. that’d just be straight up ignant.

on that note i’m going to end this post with a poem that i’ve had posted at my desk for 4 or so years now–i also have a sign that says, “jesus helps me trick people” so go figure on the crazy stuff i have hanging around my desk!! i originally came across the poem in how i raised myself from failure to success in selling by frank bettger, and I think it’s fairly applicable to this post and especially rule one. (author unknown) it’s over my desk so i’ll read it at least every other day; helps me keep focused on the tasks and goals at hand.

There may be nothing wrong with you/The way you live, the work you do,/But I can very plainly see/Exactly what is wrong with me./It isn’t that I’m indolent/Or dodging duty by intent;/I work as hard as anyone,/And yet I get so little done./The morning goes, the noon is here,/Before I know, the night is near,/And all around me, I regret/Are things I haven’t finished yet./If I could just get organized!/I often times have realized/Not all that matters is the man;/The man must also have a plan./With you, there may be nothing wrong,/But here’s my trouble right along;/I do the things that dont’ amount/To very much, of no account,/That really seem important though/And let a lot of matters go./I nibble this, I nibble that/But never finish what I’m at./I work as hard as anyone, /And yet, I get so little done, I’d do so much you’d be surprised,/If I could just get organized.

It is seriously amazing how predictable things are when you take a step back and look at the big picture. Do you guys remember my post on January 2nd of this year speaking about Gold, Oil, and recession? If not, go ahead and read it (Oil hits $100 a Barrel, Gold hits $850, Dow Drops…). I believe we still have a ways to go.

Today:

OIL: Light, sweet crude oil. Oh how sweet it is! $111 and $110.70 were the highs I last saw. Passing $100 back in January was a benchmark. $110 two and a half months later? That’s 10% in that time frame! Can you beat that in an investment standpoint?

GOLD: That yellow-ish, shiny metal hit a benchmark today. $1001. Based on inflation, it is not at it’s all-time high. Actually, it is just about 50% less in value. If we go into a recession, we’ll be right up there again. Back in 1980 (taking into account inflation) the price of a gold ounce was just about $2,177.

DOLLAR: What’s up Benjamin? WTF. Since January I have been moving money to Euro’s through my ETrade account. And you know what? My buying power is increasing as the dollar continues dropping. I don’t think this will go on forever. But this year? My gut says it is… so far so good. The euro rose as high as $1.5625 and in Asia, 99.75 yen before hiking back to 100.27 yen. Seriously, this isn’t good for America.

Some recent blog posts on the topic:

k5dkz.com
blog.sharenet.co.za
crooksblog.sovereignsociety.com
thetraderblog.com

I also found an interesting post about the new $5 bill at chatterlounge.com. Check it out!

keith johnson over at environmental capital of the WSJ points us to the services of Firstlook, a new mashable combining atmospheric data with google maps. and the result is AMAZING.

i’ve been a big fan of alternative energy for years; being immensely curious about the potential of starting an energy production company, i was always dismayed at how difficult it is to quickly get estimates for power-production (how can i calculate #s without a basis in input figures?). actually getting site assessment is extremely clostly and Firstlook eliminates a lot of the intial grunt work, especially for entrepreneurs (or even environmentally conscious consumers) looking to compare regional advantages of solar over wind.

keith says that the company’s goal is to provide wind-farmers more information that can leverage their power-production efforts to be more valuable, essentially by providing them models for how “dry” seasons will differ from “wet,” making a great head-to-head with hydroelectic power.

i aslo see this mashable as emensely valuable for developing nations. by eliminating many of the costs for a professional site assesment, a local village could locate where in their region a small solar or wind farm could produce energy for them. there’s not even a need for creating an electric grid and services like this one can really empower a local community. this is a win-win for those nations since they can simply by-pass the infrastructure costs of building a grid from the ground up, by instead focusing locally, rather than nation-wide. once there’s a small bit of power, the local development options can increase quite quickly: from water and agriculture to increased literacy rates (not to mention the internet!!). from my understanding one of the major hurtles to raising the standard of living is satisfying basic necessities, power generation being among those needs since the applications are quite numerous: food preservation to education to water & sewage management.

there’s no information on the site now for non-US countries/regions but it’s still a fantastic start and i’m looking forward to seeing more come from these guys.

also worth a quick note, i’m a HUGE fan of the business model which allows for the basic use of the product for free but then charges for more detailed reports or maps. fantastic! 3TIER’s distribution margins went to zero by being on the internet so content is generally free to produce and distribute and only the most dedicated need purchase the servcie.

founder/ceo Kenneth Westrick may be an atmospheric scientist by training but he’s definitely got the internet figured out! his business plan could be a page right out of seth godin or chris anderson’s play book. go westrick; serious kudos!

Take a look at this CNN interview with John Williams from LiveLeak.com:

I have been doing some extensive research online as to how to better manage your finances. I have personal and business bank accounts, credit cards, stock accounts, car payments, bills, and so on. So, my mission was to find the right tools online that would help me keep organized, know how much I am spending, and help me be more frugal with my money. Everything from keeping a daily budget log to viewing all of your accounts in one place and even discussing your finances with other individuals, it’s all here.

Here are my results:

Yodlee -
Yodlee is probably the most established account consolidation software on the net. You enter in all your bank, credit card, bill, travel, and other financial accounts, and you see all the data on one page.

BudgetPulse -
BudgetPulse has the ability to have multiple accounts, track money, and plan budgets. The system provides you with analysis, charts, reports, and RSS feeds with your data. “BudgetPulse, acts like pulse to show our health condition, is a simple online tool that aims to reflect our financial situation.”

Xpenser -
Xpenser is an easy way to keep track of the money you spend, as you spend it. You can add expenses via Email/PDA, SMS, Twitter, IM, Voice, or from your web browser.

WalletProof -
Very similar to Xpenser, WalletProof let’s you set specific budgets and then enter in each expense as you incur it.

SpendView -
The idea behind SpendView is to consolidate, categorize, and track your accounts. It seems to be very similar to Yodlee, but not quite as intense.

billQ -
billQ is a web-based application that gives you an easy way to keep track of your bills, receive reminders before they’re due, and make sense of them once they’re paid. With billQ, you always know exactly what you have to pay, and when you have to pay it.

Wesabe -
Wesabe is an online community of real people, with real financial goals and concerns. You can compare and discuss your finances with other individuals.

Mint -
Very similar to Yodlee as well, but looks much better. Great graphical interface that allows you to view all of your accounts and manage your money in one place.