AskDong

In the last part of this series, I discussed Fixed Income Investments. Today I turn the discussion to Stocks. People are generally far more interested in stocks than they are in bonds. While some have made fortunes in the bond world. The more famous names are those who have their fortunes in the world of stocks. There are the investors; Warren Buffet, Peter Lynch, and the now tarnished star of Eddie Lampert. In addition to the investors there are more importantly the entrepreneurs who’s fortunes have been tied to the stock in the companies they founded. Bill Gates, Larry Ellison, Sergey Brin, and Larry Page are the name today. But in the past it was the likes of Ray Kroc and Henry Ford. While the times have changed, the fundamental nature of stocks have not.

Stocks merely represent a ownership shares in a company. However typically when we talk about stocks in the investment sense, we talk about shares of publicly traded companies. Public companies agree to certain account conventions and rules of disclosure for privilege of allowing it’s shares to trade on public exchanges such as the New York Stock Exchange. There are two primary reason for companies go “public.” 1) to raise capital to grow the business 2) to allow the original investors to cash out (at least some portion). More often than a not a company will go public both reasons as is typical with a tech start up. A technology start-up both needs to capital from an Initial Public Offering (IPO) to grow the business, and allow for the initial investors, typically venture capital firms, an easy method to quickly earn a return on a investment.

A share in company represents exactly that a share of the company. Let’s take for example Google which has a share price as of 2/12/08 $518.09. Google has a total of 312.8 Million shares outstanding. One share therefore represents 1/312,800,000 of the company. The total market cap (or total worth) of Google is $518.09 X 312,800,000 or about 160 billion dollars. While one would think that the intrinsic value of a company should not really change very much day to day or minute to minute. However in the case of public companies it does. Everyday shares exchange hands and at any given time those shares are worth only as much as what the next person who wants to buy is willing to pay. For that reason Google has lost about 40 billion in value over the last 2 months despite running the same business it has ever run.

For most people stocks, though not individually but in a vehicles such as Mutual Fund, should make up the bulk of one’s investment portfolio. Historically speaking U.S. equities have returned between 9 and 10% annually, far outpacing fixed income. Of course if you were to look at how those returns were delivered, it’s not smooth ride of 10% year in and year out.

So what do you look for investing in stocks. While I have my own metrics, mostly based my reading of the Intelligent Investor, stock picking is difficult. Few professionals consistently beat the market, and many academics believe it’s outright impossible to do so. I’ll save the arguments on beating the market for another day.

I think most people agree that parents have a financial responsibility to their children through at least the age of 18, and most people would probably agree that parents should bear at least some if not all responsibility through the end of college. Some parents take that responsibility a little too far as would seem the case here with the Blocks who gave their adult sons their Acura and mini cooper as they downgraded to a Honda Accord. I’ve always felt that parents who help their kids too much are in fact doing their children a disservice. Independence is more often than not a learned trait.

While the discussion of parental responsibility is common, the discussion of the responsibility children have to their parents much less so. Personally, I’ve always felt that children have as much responsibility for their parents as parents for their children. However, I will also acknowledge that it may be very much personal bias. Part of that bias is somewhat cultural being Chinese-American, but the greater part is just the type of relationship I have with my parents. My parents did not arrive in the U.S. until their early 40s, and made enormous sacrifices so that my brother and I are in the positions that we are. Few things make me happier than being able to give back to my parents. The financial ties I have to my parents are close and more flexible and fluid than what is typical in most families.

The question remains. What do we owe our parents? The simple answer is generally, “Alot.” However unlike children, parents are generally self sufficient through a good portion of a child’s adult life. They don’t need or don’t want anything from their children. More often than not they’re still trying give what they can to their children. The question for adult children is what can they give back? The most basic and one would think obvious is that adult children need to the be former rather than the latter, i.e. they need to be adults rather than children. Self sufficiency is the greatest gift that any child can give to his or her parents. That aside, theresponsibilities vary widely across families. What may be too much in one family is not enough in another.

In the last couple of weeks I’ve been reading many article on the slowing of consumer spending, and today I read an account on the slowing of consumer borrowing.  The business press push these reports as signs of gloom and doom.  When I heard that January sales at Macy’s had plunged 7.1%, I thought it good that Americans were cutting back.  The fact they are borrowing even less is even better.

I do not want to discount how important consumer spending is to the Economy. Consumption is the bulk of GDP.  For those who never took Econ 101, GDP is defined as: GDP = G + C + I + (X-M). C = Consumption, G = Government Spending, I = Investments, X = Exports, M = Imports.  Lower consumption leads directly to lower GDP and a slowing economy.  In itself this is bad thing.  However, I feel we can weather the storm.

What is often left out of the GDP equation is the importance of Investments (I). Investments in the Economic sense are capital outlays, i.e. building a new factory or new technology. The beauty of investments is that it not only contributes to the GDP today, but leads to greater GDP in the future. Capital improvements generally lead to increased productivity. While not all savings becomes investments, there’s no question less current spending means higher savings. There needs to be balance of current spending and savings.  American has too long in the last quarter century favored the former and frittered away prosperity dervied from the savings of the first part of the 20th century.

While I’m still working on figuring out exactly what information I wanted to share as related to my investments, I’ve started my new spreadsheet. As reported earlier, January was a terrible month for stocks. I was lucky to escape the month with about 2% decline in my total portfolio. The S&P 500 was down a little over 6% for the month of January, and could’ve been down much more if not for a rally at the end of the month.   Below is my performance from Jaunary 1st to February 1st 2008.

My worst performing account was my new Vanguard Mutual Fund account. I opened the account late last year and am making it my primary passive investment vehicle outside of my 401K. The nearly 10% hit I’ve taken in that account is an unfortunate consequence of when I opened the account, but given the small relative size of the account the losses are not a huge deal. I realize the reporting on my investment is still very limited. I would like to be able to provide as much information as easily possible while still maintaining a certain level of privacy. My hope is to improve this monthly update with each coming month.

With the passing of Super Tuesday, the Republicans have a pretty clear front runner in John McCain. The Democrats have settled nothing as Obama and Clinton are running neck to neck. I do believe either Obama, Clinton or McCain be will our next president.  I rather not belabor political points too much, but I thought I’d contrast the leading candidates on the most basic of fiscal/economic issues.  I decided to look first at what the decidely conservative, Club For Growth had to say about each candidate on some of the issues. T he Club for Growth hates democrats and is unabashedly idealogically biased, so their opinion and stated facts need to be taken with a a bucket of salt.  However after reading what the Club had to say, I’m not sure what was true and what wasn’t as it was too difficult to parse fact from bias.  I did some more basic research. Obama and Clinton are pretty much the same page while McCain, not suprisingly as Republican, tilts more fiscally conservative.

Taxes:

• McCain - Opposed Bush’s 2001 Tax cuts, though supports them today
• Obama - Roll Back the 2001 Bush Tax cuts on the top brackets, increase capital gains tax
• Clinton - Roll Back the 2001 Bush Tax cuts on the top brackets, increase capital gains tax

Spending
No candidate says they’re are fan pork, and will nilly spending. It’s hard to say who is truly more fiscally responsible. Democrats and Republicans like spending alike, just on different stuff. That said McCain in his time in office has been good about trying to trim pork. Both Clinton and Obama do not really have enough history to say one way or another if pork is something that concerns them.

Free Trade
McCain - Supports CAFTA
Obama - Against CAFTA, and wants to Revise NAFTA
Clinton - Against CAFTA

Immigration

• McCain - Amnesty for existing illegal immigrants
• Obama - Amnesty for existing illegal immigrants
• Clinton - Amnesty for existing illegal immigrants

Energy Policy

• McCain - Believes that climate change is real, supports nuclear power and alternative energy
• Obama - Supports Alternative Energy and is a reluctant supporter of nuclear power
• Clinton - Support Alternative Energy