Investment Playground.NET

I’ve spent some time away from blogging for the last few days. And my recent post about building a website is exactly why.

The point of this whole post is to explain to you all that this process is NOT EASY. My website and new small business is a social driven community. From the social aspect spawns the ability to purchase goods. However, the success of this site is completely dependent on achieving prime search engine optimization and being one of the top ten results under google or yahoo.

So the problems I’ve been having are essentially the fact that I don’t know enough about web design. I’m a business-man, not a computer guy. It seems to be that being a computer guy is quite a profitable business. The website that I could create using the limited HTML knowledge that I have, combined with off the shelf tools such as Dreamweaver would result in a two-bit site with limited functionality. And that’s okay for some people and some websites. If you need some basic web page built for your company - these tools will work perfect. So don’t let me deter you.

But what my site needs is moderation, interactivity, graphical appeal, and above all TOP search engine optimization. This is what I’m finding out… the price for market research is somewhere around $500. This is generally a necessary step for top-notch websites. The company building your site, such as Q-Infotech, WebMotif, or WebBizIdeas, has to run an analysis studying competitor sites and how they rank on the Internet. What keywords are top hits, what type of clicks do they get, and the like. Until you have an idea of traffic generation and keyword optimization, you can’t develop a top website which consistently shows up as the top ten results every time. Once you’ve crossed this step, next comes the actual mapping and building of the site. This is where the real dough comes into play. A very loose estimate is between $3000 and $10,000, the latter for very complicated sites with many layers of pages. Additionally, if you need a regular hired resource or moderators or webmaster, these guys aren’t cheap either. Perhaps $1000 monthly (I haven’t gotten the quote for this yet - consider it a guess).

All in all its a pretty penny. But I want to go through this exercise to explain a concept called RETURN ON INVESTMENT. It’s quite simple. What percentage return can you expect from your website/small business? An investment into the stock market can be 10% if you’re average, 20% if you’re good. Which means $5000 thrown into the market will earn you $1000 per year (if you’re good), or about $83 per month. This is your benchmark.

All investments we make need a benchmark. The easiest thing to do to make money is by throwing it into an index fund, which may make an average 10-20% annually. So if its so “easy” to make $1000 a year, why should you work so hard to make only $900 or so? For all your side-income investments, make sure to compare your returns with a benchmark level. If you’re starting a small part-time business, as I am, a return similar to the stock market is the level I consider “satisfactory”. With that said, I’ve determined that the amount of net income I must receive on this new site, assuming I spend about $5000, is $42 per month. Sounds tiny - but this figure is the borderline minimum I must make to be satisfied with my venture. And this is after all expenses.

So - one thing left to do. Find your minimum return - and achieve it.

I’m truly fascinated by Facebook and its other insignificant predecessors.

Personally - I hate the whole notion of having people that I don’t want to keep in contact with know my “bio” or “profile” and any info about me. Twitter’s another example. Why on Earth would I want people to know everything I’m doing on a minute by minute basis. Loopt, MySpace, Friendster - I just don’t see the logic.

But big business transcends “logic”. Regardless of my personal feelings - I sincerely believe the future is going to lie in social networks based solely through the computer and mobile phone.

I joined Facebook this weekend. I already have people writing on my Wall, whatever the hell that’s supposed to mean. But what I find so intriguing is the applications. Open source development: code word for anybody can build a piece of software to put on the site. What a brilliant idea.

So instead of Facebook programmers sitting in the war room trying to keep up with demand for more and more applications, quite contrarily they’ve decided to let the world create their own applications. And the world releases them for free on Facebook, achieving revenue through indirect methods (people who like the application request more, advertising revenue, etc). Essentially, the Facebook programmers have hired the world for a discount fare.

I don’t know enough to write a good solid case study quite yet. But I do know one thing that can be a “lesson learned” from all of this:

• Fill an existing void and let the customers declare what they want.
• Give customers the illusion of freedom.
• Give customers a sense of ownership.

This is a loose take-away, I’m open to comments as always.

I’m building a website.

I can’t give too many details without forcing all my readers to sign an NDA. But I will tell you this - it is in suit with the social-driven phenomena, and it involves e-commerce. Furthermore, its a very niche market.

I’ve been working with some business consultants and web designers from Q-Infotech.com and WebBizIdeas.com. They’ve been able to help me frame my mental business plan (not the actual paper business plan - part II of the three-part series is coming on Friday). They ask a lot of good questions. I didn’t realize this - but website designers really can double as business consultants quite seamlessly.

The site is going to be subscription based. I can’t expect more than 500 paying subscribers in a best-case scenario, nor can I expect more than 30,000 total users of the site (some personal finance blogs see 50,000 unique visitors a month!) But the way I see it - if I’m able to attain 10% of the ultimate prime scenario described above, I’m likely to earn a few extra hundred dollars per month. The site is automated, thereby making this passive income.

If I spend $5000 building and marketing this site, and earn merely $100 per month - you may say “What a waste, all that work for $100 per month.” If you did say that, I’d tell you to shutup and then spit in your ice cream. Afterwards I’d invite you to this great website called InvestmentPlayground.net - and explain to you the concept of Return On Investment. In any given year, a great stock picker probably won’t make much more than 20%. And if you average out that stock picker’s record, he won’t make more than 11% annually over several years. The best real estate tycoon won’t make more than 25% annually over several years. Meanwhile, your savings account earns about 3.5% annually. This rate is the ROI Rate: the return on your investment. If you put $1000 into a savings account and earn $50 per year - that’s a 5% return. If you drop $5000 into building a website and earn $1200 per year, that’s right math majors… a 24% return on my investment.

The goal is not to get rich quick. The goal is to maximize my return on investment decisions throughout my life. A $10 loan might earn 20%, a $500,000 rental property might earn 30%. Keep up your investment returns and you’ll be quite pleased with the outcome.

As far as building a website goes - trying to do it yourself sucks. The last two weeks I’ve been trying to build this fancy website, and I’m awful at it. I’m a business man, not a web designer. Stick to what you know. I’ll keep you guys posted on my progress.

I always like to look at the lessons we can learn from history. Humans don’t change - we’re fickle-minded impatient people and we have been forever. So in this current official bear market, what can history teach us about the future?

First of all - stop panicking. We’re in a bear market, again. This isn’t some life-threatening ordeal. It amazes me how in every bear market, people always put the US up for sale in a heartbeat, but never seem to learn. Sure things are bad. Very bad - a perfect storm is indeed brewing with real estate, oil prices, job losses, etc. But this too, shall pass. The S&P’s peak was October 12 at 14,093 - we’re off over 23% from those highs. That’s a pretty steep drop. It gets me excited to start dumping more money in. Here’s why.

The average decline during the last nine bear markets was 31%. This means that it’s possible, yet unlikely, to fall further down to 9,700. But with that said - most of the drop has already happened, historically speaking. Most, but not all of the bad news is already priced in. Now is the time to start buying up into indexes slowly and methodically. After falling 20% - the last nine bear markets have returned a positive average of 3% within just one month of crossing that negative 20% threshold. And within twelve months, the last nine bear markets have returned an average of 17%.

17% - that is not chump change. This means that if history proves true, and we invest today given that we’ve crossed the 20% threshold, we’ll earn about 17% in the next twelve months. And if we’re no where near the bottom, we still stand to gain perhaps 10% (also not chump change).

History can’t always prove correct, but it’s definitely a good indicator. So far, this bear market has unfolded exactly as the past nine have. On average, the nine crossed the 20% decline point nine months after beginning their decline. We’re right on schedule. The past bear markets lasted, on average, another five months.

Things are pretty bad out there. But let’s get things in perspective. In the 2002 crash, irrational exuberance ruled, which is something we are all protected against today. Contrarily, when we hit 14,000 back in October, industry experts were wondering “how did it get this high?” as opposed to “how much higher?”. The market was selling at a P/E of 35 before the 2002 crash. The P/E was even higher at 40 times earnings in the 1973 crash. Back in October - we were at a mere 19 times earnings. Sure things were overvalued, but not anywhere near historical records. If that’s not enough to convince you: the 1987 crash showed a 23% drop in one single trading day. It took us eight months to do that this time around. The 1970s showed double digit inflation couple with record oil prices. Perhaps today’s 6% inflation is high, but its still manageable.

In 1990, thousands of savings and loans banks failed, and the financial sector went kaput. This caused a 20% drop in about three months. This one resembles 1990 quite closely.

I do think we have quite a bit more to go, but I wouldn’t bet the horse on it. I’d slowly start putting my money back into the market. The lower it goes, the more aggressive I’ll invest. 10,500 will indicate more deposits into my Scottrade account, and at 10,000 (if we ever get there), I’ll probably dump a ton of cash into the markets. It’s easier to hold long-term than to try and time the market.

So everyone relax and let this bear market unravel itself. It’s happened nine times before since 1956. Turn off the TV Chicken Little - we’re not done investing quite yet.

Much of this article is derived from a great piece written by Kiplinger’s.

Everyone talks about business plans but I rarely see a lot of follow through. I’m not sure what the disconnect is. Perhaps budding entrepreneurs are intimidated by the big words and sixty page word doc they’re asked to complete. Truth is - business plans are a LOT easier than you realize. For every inkling of an idea you have - start writing and putting together your thoughts. Even if the idea doesn’t surface - your business plan library will prove to make you steady income in the future. This is a three-part series.

Firstly - WHY do we need a business plan? Essentially two fundamental reasons: gain funding and follow a process map. Your Your business plan is your proposal. It contains your million dollar idea, why it’s a million dollar idea, your plan as to how to get there, the constraints along the way, the sustainability of your plan, etc. Why is your idea going to net profit and/or change the world?? Have you ever heard a friend or colleague speak about this great new idea he/she has - but you weren’t very keen on their idea or you felt as if it “wouldn’t work”? That’s where the business plan comes in. A bulletproof document highlighting exactly how this WILL WORK - and how you can get involved! Any investor will get into bed with you as long as they have confidence in your idea. Now money starts trickling in from angel investors, venture capitalists, friends, and family. Beyond being just a general good idea, if you’re looking for loans, banks absolutely require a business plan.

This all is fine and dandy - but the biggest beneficiary of a business plan is YOU. I’ve written a few plans for some great ideas I’ve had, and by the end of the plan I’ve realized all the flaws that I have, and consequently scrapped the idea. You’re writing a strategic process map and figuring out the most detailed action steps to take. You’re building contingency plans into the mix. What happens if Google enters this market, what happens if the neighbor expands his store, what happens if my product spoils, etc. If you can clearly write out every possible step that you’ll need to take - you’re building confidence in your venture and essentially - nothing will stop you.

Strategic process planning is not meant for only global companies - developing your strategy is applicable even in the case of lil Judy’s lemonade stand. She priced her lemonade at fifty cents a pop until Mike from across the street started selling his at thirty cents, and priced her right out of the market. Now Mike started Mike’s Hard Lemonade and Judy is living in a van down by the river. Had Judy built a strategic process plan, she could have limited her costs and built in a higher margin. She would have cornered her distribution strategy and been able to secure a recurring revenue stream from regular customers on ten different corners. She also could have franchised and made Mike’s friends into his own competition. When all else fails, she would have known far in advance how long she can sustain predatory pricing when compared to her competitor. Silly silly Judy.

I’ve digressed. We’ll discuss how to get started in part II. You need to learn everything possible about the market and industry you’re in. Become an expert and roll your sleeves up, digging through information. My personal obsession is espresso - and my business plan practically starts out with stating how big of a revenue-generating industry this is (and I didn’t just find these figures on google.com). Start doing this right away. If you need immediate help and can’t wait for Part II, the link below provides an inexpensive route to assistance in your business plan. I’ve purchased a few of these manuals and have generally been quite pleased. Enjoy.

Entrepreneurs, by definition, have creative and active minds. A blessing and a curse.

Right now - I’m working on seven different projects, some of them with mid term horizons, others very long term. How on Earth am I supposed to get seven things done in my spare time? I spend all my daytime hours working on ultimately dead-end corporate position thinking of what to do, and don’t spend nearly enough time doing them! What’s an entrepreneur to do?

There’s no easy way out of this dilemma. I officially declare this moment as GO moment. This is my own GO advice for those people who share my plight:

1. Focus. Forgive me for overstating the obvious - but trying to focus your attention on seven different avenues results in zero efficiency and even less results. I know - it’s hard to pick and choose - and further its easier to distract yourself than not to. If one of your several enterprises is a time-sensitive matter, prioritize that first. Don’t prioritize based on income potential - a definite no-no in the world of business. Pick one or maximum two projects and see them through to the end, or until you turn over ownership to someone else. And then start over with a new one. People like us will never tire of building/creating/designing/selling etc. So don’t worry - more ideas will come soon.
2. Be consistent. We’re all busy people. The key is not to wait for that Saturday morning where you can sit down for seven hours and bang out a business plan. Don’t try - that Saturday will never come. The key is to be diligent and active in merely sixty minutes per day, or less. Even a half hour of prime productivity daily is over three hours a week, and it barely forces you to sacrifice other meaningful things of your life (such as spending time with family).
3. Make those around you understand your sacrifices. If you’re like me - even five minutes away from your family makes you squirm. So the best thing to do to set up your one hour daily or whatever it is you decide is to develop a support team around you. Have a sit down with the family, tell them your ideas and more importantly your process plan. Have them understand the potential results with only x minutes per day. Once you get them on your side - they’ll be pushing you to work harder.
4. Save money. This goes without saying. For every person - saving money regularly is a necessity. But that goes double for those trying to invest. Saving money for future overhead should be done at the same time of developing your process plan. Don’t wait until your plan looks bulletproof and then sheepishly say “Great. Now all we need is money.” No - that’s how wannabe entrepreneurs end up working for the man for their whole life. Consider the money saved as income the business is already making (but not for accounting purposes).
5. Make your plan your business. Meaning - the one idea you’ve decided to stick with - you’ve got to live, eat, and sleep this idea. When you wake up in the morning, you should be running over to your notepad to jot down the great night full of plans you came up with. When you’ve got a dinner party to attend - make it your business to talk to others about it. Not the actual idea - don’t give away secrets. But the general framework/industry/customer perception or whatever you need to get the creative juices flowing. When you watch TV - think about how your entrepreneurial venture can help out each one of those people on the screen there - the celebrity, the guy in the commercial, the high school kid, the milkman, - whomever. Develop your market. Bottom line - constant focus and making your plan all about your presence is in itself time spend building.

Be resilient and dedicated beyond anyone you’ve ever met. And get used to it - entrepreneurs enjoy GO more than they enjoy the finish line. It’s the challenge we crave.

Firstly - it’s a scary market out there. Don’t get into new picks and dumping more money unless you’re comfortable tying your money up for at least a year, perhaps several years.Secondly, I’ve been doing some research on “the next big growth area” or whatever you want to call it, and I’m finding that developing nations are now slowly mandating the installation of airbags in all vehicles. This means that key niche companies which focus on airbags and safety equipment and have heavy international exposure may benefit immensely. I found one such company - ALV.

Autoliv is a Swedish based American company with employees in 30 different countries. This pick is a growth play with a one to two year horizon. I took a look at their annual report (which is the first place you should look when analyzing stocks) - and their revenue is in solid shape, increasing 9% in the last year to $6.8 billion after modestly dropping the year prior. Their net income is flat after adjusting for one-time issues (but who doesn’t have one time issues nowadays?). They’re focusing on lowering costs and increasing profitability by switching over to low cost countries - here we go India.

The company generates over half of its revenue from Western Europe, but only a quarter from North America. So 22% is from the rest of the world, which doesn’t bode greatly for our developing nations theory. However the growth and revenue boost they saw in 2007 is directly from emerging markets. They’ve doubled their China based plants to nine in the last year and opened up plants in India and Korea as well.

The competitive arena is limited to three major players besides Autoliv - TRW and Takata. TRW is a major player, but Autoliv seems to have been stealing market share from them. Takata enjoys a smaller share but is growing fast. The remainder of the market is extremely fragmented.

I’d like to look into the risks in more detail - but the prominent risk that stands out is if they can grow profitability in the near and long term. It’s a capital intensive business - and you’ll need thousands of full time resources focusing on this constantly.

Autoliv has been increasing forecasts and guidance lately (one of the few in 2008). The price point of $45 is down 20% for the last twelve months and off 30% since 52-week high of $65. they also raised their dividend to a 3.6% yield, and they’re 87% owned by institutions. They’ve been steadily buying back shares and regularly increasing dividends (dividends increasing at 25% CAGR for the last five years).

I’m going to continue digging before I add it to my portfolio - particularly I’ll have to try and find some sell side reports and find out what the experts think (”expert” is a relative term). But for now - it looks quite intriguing. If you find a stock you may be interested in - you should do a similar type of analysis. What do they do, how do they make money, where does it come from, how has their revenue and profit grown, what is the long term outlook on industry and company, who are key competitors, what are key threats, how expensive is the stock, etc.

The best part is - opening the 10K and writing this article took me about 35 minutes of research. That’s all. Don’t try and time the market - do your research and buy good companies at good prices for a long term horizon - and you’ll be rolling in your investment playground.

What a bloodbath June was. From May 30th to June 30th, the Dow Jones Index tanked 9.3%, ending at the lows of the month of 11,350. We haven’t seen levels this low since August 2006. The S&P 500 fell 8%, and the NASDAQ fell 6.8%. 

When the market tanks this bad, it’s really hard to stay afloat. Your goal is to outperform the markets. And if you’re better than most - your goal is absolute zero (to not lose money). Don’t beat yourself up - absolute zero is VERY VERY hard. Hedge fund managers usually have a policy of absolute zero, and most hedge funds end up like yesterday’s corn on the cob - down the toilet. 

So overall, my portfolio consisting of cash, two stocks, one index ETF, and two mutual funds ended up down 8.5% for the month of June. Essentially - in line with the broader market. I’m not particularly thrilled - but the only way to really gauge your investment ability is by looking long-term. In fact - because you’re so confident of your choices, now is a good time to buy more instead of considering selling at a loss.

• We’re on a regular automatic investing plan with Fairholme Funds (FAIRX), so it gives us an easy ability to take advantage of depressed prices. The fund is down 8% overall since purchasing. Fairholme is non-diversified with a US focus.
• Our T. Rowe Price Africa/Middle East Fund took a turn for the worse, down less than 1% overall. This is the first time we’ve entered the red with TRAMX, but the discontinuity to the US markets make this my strongest pick.
• Hewlett Packard is getting beat like Sisco at a Garth Brooks concert - down 15% since purchased. We had a blog posting about this - which basically says “why oh why would you buy ANYTHING near its 52 week high?” I deserve a 15% loss. Nonetheless - within time I’ll be buying up plenty of HP to offset my embarrassing mistake.
• Brasil Telecom is down 8%. The stock rose to a 10% gain and then I stepped out for lunch. One reuben sandwich later - Brazil’s inflation goes to hell in a handbasket. No worries however - just yesterday I received a tender offer for my ADR shares, so we’re looking at making a handsome profit. I’ll give more details later.
• The new addition to the portfolio is SPY, the S&P 500 ETF SPDR. Flat performance.
• Overall portfolio is down 5.82%. Stick with long-term investing, don’t time the market, and don’t do something ridiculous like selling - and you’re all set.

Separately, a declining home price and car price (yes even your luxury car) has brought my asset value down 1.3%. Liabilities were flat. Overall, my net worth has fallen over 9%. I contemplated throwing myself over the Brooklyn Bridge, but then I remembered - long-term is the way to look at things.

Besides - the East River is disgusting.