All that glitters is not gold.

Sometimes glitter takes me for money; sometimes it takes me for opportunity.

What’s up in my portfolio

Those of you who have followed this blog for any length of time know that I’m not too peculiar about where I invest. In 2011, I had virtually all of my portfolio in four micro and small cap companies no larger than $300 million. All but one ended in very favorable acquisitions. In 2012, I went larger cap, seeing opportunities in automakers, offshore rigs, dead animals, and Adams Golf, the only company to appear twice. That mix also proved to be very profitable. I crushed it in tiny names in 2010, raking in 70% total returns. Then 2012 was excellent, reaping the benefits of options on RIG, a buyout of Adams Golf, and a rising Darling International, which I cut earlier in that year at my $18 target.

In 2013, I went with a business development company, a nanocap cashbox, and a shipbuilder. Oh, and the S&P 500, because I lacked any other really good ideas.

So that’s the history. In general, about 90% of my portfolio is invested in my annual top picks each year. I do the Greenblatt thing, for those of you familiar with his “magic formula,” holding most for just over one year in an ideal world.

Some losers and dead money

Ford

Two years ago I said that I was going long Ford in a series that played out for far, far too long. I (foolishly, in retrospect) bought downside protection by going in long-dated calls (LEAPS) and getting eaten alive by decay.

After rolling that position over once, I made out with a profit that only barely exceeded the broad market during the same period while accepting FAR MORE risk because I bought options.

Looking back, I’m not quite sure what got into me. That position was dumped in the past week, and I’m not too happy with it. I dumped it in large part because I didn’t want exposure to large caps given the stock market’s recent rally, but the thesis I originally thought would and should play out has been (finally) adopted by institutional investors, who underowned the stock for much of the recent past. (One automotive analyst complained through the years that no one wanted to talk to him, an indication that institutional investors had no interest in buying autos.)

So, while Ford’s rallying, I have no exposure. Sweet! End result: slightly above-market return for substantially above-market risks.

Apache

I’m nearing a year of holding a small part of my portfolio in Apache, an “acquire and exploit” oil and gas company with assets all around the world. I was sucked in last summer, and the results have been less than impressive.

I’m breaking even on it while the market is up more than 20% in the same time.

I still think it’s a relative value in part because its risky assets overseas (Egypt) are underappreciated by Wall Street, and management has been slow to respond to shareholder concerns. Management outlined a plan that would have the company selling assets to repay debt (capex has exceeded cash flow in a rare event for the company) and repurchase as much as 7.6% of outstanding shares. I like the idea of selling assets to repurchase shares, since the company can essentially sell X barrels of oil and oil equivalents and repurchase X*2 or 3 barrels of oil equivalent thanks to the fact Apache stock is cheaper than the sum of its parts.

I’m still holding on. I like to have some exposure to energy as a general rule (though I don’t always follow through with that), and this is my pick. It also, somewhat, counterbalances the risk to Conrad Industries in that it would benefit from new oil pipelines whereas Conrad would lose some new ship construction business. Apache previously served as a hedge for Darling International, which uses natural gas as a key input.

Learning lessons

Looking back through all my positions, I realize something that is very clear: large caps aren’t my thing. I’ve known that for awhile.

I can get very impatient. I’m especially impatient when things aren’t going my way. For example, all the while Ford’s business was improving, general periods of weakness in the broad market lead to crushed stock prices. No matter how cheap it became, no big investors seemed interested in owning it. Now they want it – and I don’t own it. Woe is me!

Also, options. I just shouldn’t. I accept my hypocrite crown for believing that in the short-term the stock market “behaves like a voting machine, but in the long term it acts like a weighing machine” yet purchasing time-limited options, in effect saying that I don’t care to wait.

I tend not to get so impatient with smaller companies. It is possible to know tiny companies much better than the market. Whether or not I do is up for debate, but of course, when I can buy a company for less than its net working capital, I’m confident I’m doing the right thing. Same thing goes for single digit EV/EBITDA industrial names, or companies trading with earnings and free cash flow yields well above 10%. I (generally) only find such opportunities in very small companies.

My goal is to stay in a fully-invested, concentrated portfolio of companies that, I believe, trade at a substantial discount to the market. The ideal company also has a potential suitor interested in an acquisition. Over time, that has been a winning strategy. I see no reason why that should change.

Luckily, my biggest losers and dead money have been only small parts of my portfolio since I don’t really like large caps, but they occasionally lure me in with the promise of opportunity. That’s the upside.

You can’t win all the time, though I wish I could. What I can do, though, is learn from the investments that slap me across the face every once in awhile. As Buffett says, “If every shot you hit in golf was a hole-in-one, you’d lose interest. You gotta hit a few in the woods.”

I’m taking a short break. Yeah, I know – a brief hiatus for a blog generally means the writer disappears for months.

I won’t be doing that.

Last December I made a few promises to myself, the most important of which was that I’d be a college graduate in 2013. I’m no genius; school hasn’t exactly been a cakewalk. It is getting easier, though, as I find my list of finance classes much more interesting than general education credits. Rocked my second-ever-in-college 4.0 this semester without buying a book. Feels good.

I’m making a couple sacrifices to get out of school earlier than anticipated. For one, my summer has been sold to the system; I’ll be a full time student this summer, and finishing out 18 hours of 400-level finance and accounting hours this fall. Slap full time work on top of that and…well, it won’t be fun, but at least I’ll be done. Things are looking really good on the job front after graduation, so that’s something to look forward to.

For the next 7 months, I’ve two whole weeks without school. I’m making the most of those, one of which is the next 7 days starting right now. My last final was yesterday and my first summer class is…next Wednesday. Bummer.

In the meantime, kick it in the archives with some retro posts:

• Why Lotteries Are a Great Investment for Poor People
• What 80% of Wharton MBAs Don’t Know about Retirement Planning
• 6 Reasons I Don’t Like Dividends
• Harvard’s Banking on a US Manufacturing Recovery
• Why Games of Monopoly Last Forever(and why they shouldn’t!)

I’m fairly sure each of these are at least 2 years old now. Time flies!

Picking stocks isn’t as easy as it’s made out to be.

Unlike the private markets, there’s a daily mark of just how good you are. If you buy a McDonald’s franchise, you can’t go online and look up its value every 10 minutes like you could with McDonald’s stock.

Mr. Market is a finicky guy. Sometimes he offers you to buy companies for less than the cash they have on hand – Pawn Star stocks. Sometimes, Mr. Market laughs at you, like when Warren Buffett missed out on the dot com boom, or when he bought a railroad at the depth of the recession. (See my article on Why Warren Buffett Lied to you about Railroads – I think it’s my favorite of all time.)

The point is, making a case for a particular value for a company is hard, in part because the market can disagree with you for a very long time. For equity analysts, people who get paid to value businesses, the disconnect between your valuation and the market’s valuation can make you look like a fool!

Stock Analysts tell All

An article in the Wall Street Journal shows just how backwards the business of analyzing companies really is. Researchers asked sell-side stock analysts about their daily business to publish the compiled results.

Here’s what they found:

• Private phone calls win – Private phone calls with management were listed as the most useful source of generating useful earnings information. Private phone calls. Not public conference calls. Note the difference.
• Bullishness prevails – Nearly 40% of analysts said that issuing lower earnings forecasts would result in losing access to management or getting ignored on conference calls.

Is this true? Of course!

Ask John DiFucci, who works for a prominent Wall Street bank (JP Morgan) but is rarely allowed to participate in conference calls for Salesforce (CRM). His criticism of the company’s business model and slowing growth earned him silence. Only the people who are most bullish on the stock get the chance to speak. Mmmm groupthink!

Less analysis, more insider information

I find it interesting how the data from the research shows analysts are most interested in talking to management. For one, management doesn’t have to tell the truth. Second, many of the most successful investors in history never really talked to management. Neither Ben Graham nor Walter Schloss did. Schloss compounded his investors’ wealth at a 15% annual pace for decades, too, mind you.

Relying on management for information gives a false sense of security. On one hand, managers know what the next quarter will look like. On another, they’re only going to tell you what makes them look good. So analysts open themselves up to highly accurate short-term information (necessary for accurately calling a quarterly earnings number) that lacks any context on in long-term difficulty.

Furthermore, investors should be troubled by the accuracy of sell-side price targets. If maintaining a high price target is the only way to keep managers happy – and keep information flowing – why wouldn’t sell-side targets always be higher than they might otherwise be?

This is why I try to stay away from analysts’ price targets and earnings guidance, besides the obvious fact that I don’t care nearly as much about one quarter as I do the next 10 years. Analysts on the sell-side have to keep far too many people happy to worry about analyzing the value of any given business.

Everyone else is writing about it, so why not me?

Apple just raised $17 billion in what was the largest debt offering in history, beating a $16.5 billion offering by Rosche. No doubt, Apple, Goldman Sachs and Deutsche Bank just wanted to claim that number one spot.

Why Apple is borrowing heavily

Apple has a tremendous amount of cash on its balance sheet. The company has $145 billion in cash, much of which is overseas, currently untouchable by Uncle Sam. When a company brings foreign profits back to the United States, it has to pay the corporate tax rate (roughly 35%) minus taxes paid abroad. Thus, if Apple pays 5% in income taxes on foreign profits, it would have to pay another 30% should it bring that cash stateside.

By borrowing in the United States, Apple can borrow cash to pay dividends and make repurchases in the United States without paying taxes to bring its foreign money home.

In effect, Apple is engaging in some kind of tax rate-risk arbitrage. Apple is choosing to borrow funds inexpensively on the hopes that:

• Corporate taxes in the United States are lower in the future.
• The United States offers some kind of repatriation holiday, in which US-based corporations get a one-time chance to bring cash back home at a lower rate. The last repatriation holiday was in 2005, when companies brought money home at a low 5.25% tax rate.

Issuing debt to avoid current taxes is more affordable than at any time in recent memory. From the Wall Street Journal:

It borrowed $5.5 billion for 10 years at an annual yield of 2.415%. It also issued three-year debt at 0.511%, five-year debt at 1.076% and 30-year debt at 3.883%.

In 2005, for example, this maneuver wouldn’t be so economical as it is today. The 10-year US Treasury had a yield between 4 and 5 percent in 2005. In short, Apple is borrowing more cheaply today than the US government borrowed in 2005. That’s pretty insane to think about.

Odds-on for a repatriation holiday

Will the United States offer another repatriation holiday? There’s nothing that says it is certain. For one, the current political climate does not favor proper tax strategy, which can be easily labeled as use of a “tax loophole” or “tax evasion” and plastered all over TVs in American living rooms.

On the flipside, though, betting on a tax holiday looks like a fantastic option for AA-rated credits like Apple. Supposing that in 10 years, the US government offers a one-time repatriation holiday at a tax rate of 5.25%, companies like Apple would knock off 30% from their tax bills due. In the meantime, Apple would have paid only 24.15% in pre-tax interest costs. Net of the corporate tax rate, that’s about 18%.

So, total savings? 35 – 5.25 – 18% paid on debt, for a ~12% reduction in taxes by delaying payments to Uncle Sam. Not too shabby – and I didn’t include Apple’s current earnings power on its cash balances. Apple’s current dividend yield of 2.9% is heavier than the cost of servicing its newly-issued debt. Thus, for each share repurchased with borrowed money, Apple will actually conserve cash.

On Apple as an investment

I’ve written about Apple in the past, criticizing the company’s terrible capital allocation. A combination of David Einhorn’s off-the-wall preferred stock proposal and shareholder annoyance with a falling stock price finally got through to Apple executives that the company needed to do something with its bloating cash balances.

As for the debt or equity, neither strike my fancy. Even though Apple is valued at about 8 times free cash flow with more than a third of its balance sheet in cash, it’s not as cheap or as predictable as many of the small and microcap stocks I find in the fiery hell of the Pink Sheets. However, it is much more compelling given that Apple finally recognized that capital allocation is key to the new investors it must appease.

I just don’t do the whole technology stock thing. I could have never predicted the iPhone, the iPad, the failure of the GPS, the rise of Facebook, or the death of Kodak to happen when they did. Besides, it’s free to be a spectator.

Mortgage REITs are getting an eye from the SEC.

Using leverage, mortgage REITs purchase mortgages on the open market, and pay out much of their income in the form of distributions to shareholders. Distribution yields are fat. American Capital Agency (AGNC) currently rewards investors with a 15.25% distribution yield.

Yeah, 15.25% in an environment where the 10-year Treasury pays less than 2%.

Knowing that, you probably wouldn’t be surprised to learn that American Capital Agency now has more than $100 billion in mortgage assets on its balance sheet. But I think most everyone would be surprised to learn how quickly this mREIT has grown. Assets grew 20 times over in the past 3 years.

It isn’t the only mREIT in the game. Annaly Capital Management (NLY) has $133 billion. American Capital Mortgage Investment Corp. (MTGE) has $7.6 in assets. There are a number of mREITs on the market, and they’re all attracting investment dollars like there’s no tomorrow. Who can blame investors for wanting a little yield? Double digit distributions sure beat .2%.

Where there’s money, though, there’s government.

Sheriff SEC is back in town

Regulators worry about the growing size of mortgage REITs. (We did have a financial crisis led by a housing boom, after all.) Their chief concern is growing risk to the banking system. If REITs get too large, a failure of one would mean a failure of many…perhaps the whole banking system would take a dive if a crisis once again hit the mortgage market.

Helping fuel their view is is the retail investor. Grannies and grandpas around the country are probably snatching up more mREIT assets than they really should hold.

Of course, that’s the regulator viewpoint. I think the risks to the system are mostly overblown.

Mortgage REITs aren’t that risky. I compare them to banks. A mREIT is a bank that doesn’t do…banking stuff. It borrows short term money and reinvests it in longer-term securities. It’s a game built on the yield curve. Borrowing at 2% and lending at 5% is a very profitable business.

Mortgage REITs are also in a very comfortable place. Unlike banks, they don’t have to get Fed approval for share repurchases or dividends. When a mREIT makes money, it pays out virtually all of it in distributions. When a bank makes money, it can sit on it, make new loans, or, if approved, pay a dividend. Approval is far from certain.

You can see the love for mREITs in valuation. Regional and community banks, which hold many of the loans they originate, trade for much less than book value. mREITs have actually traded at a slight premium during the same period.

The truth is banks, not the SEC, should have a problem with mREITs. Banks have to make new loans to put capital to work. How annoying it must be to expend time and effort to get a mortgage signed when your own equity – all the loans you have on your books – trades for less than book value.

Should you fear mortgage REITs?

No, not really – especially if you aren’t invested in the industry.

Mortgage REITs operate with leverage right around 7-8 to 1. That’s the “standard,” although no standard actually exists. Banks operate with significantly more leverage. Goldman Sachs currently levers itself at 13:1.

As far as insolvency goes, banks are not only more levered than mREITs, but they’re also FDIC insured, leaving taxpayers with the bill given any fallout in the banking business.

Also, in terms of the greater financial industry, mREITs are still small operators. Wells Fargo had $126 billion in mortgage backed securities as of its 2012 annual report. That needs perspective: one line-item of a single bank is just $7 billion shy of the largest mREIT in the world.

In short, mREITs are not a big part of the mortgage market. As investments, they’re exceptional for a very small part of your portfolio. Roughly 3% of your portfolio in an mREIT will add .5% in in annual pre-tax yield to your total portfolio. That’s good money.

Of course, I’ll admit my own bias. I don’t own REITs, but I do own shares in the company that manages AGNC and MTGE. American Capital Ltd. (ACAS), a 2013 stock market pick, manages AGNC and MTGE for a very lucrative management fee. I’m just a little annoyed the SEC is thinking about capping how large an mREIT can be.

In January, PBS ran a piece on the scam that is mutual funds in your 401k. The 401K is notorious for offering terrible investment choices that are laden with high fees. In all reality, it’s the easiest method of preying on the uninformed, the dumb, and the people who lack the sense to care about what they invest in.

Of course, a left-wing, Wall Street hating blog repeated the same story again, and it’s making its way around news aggregators online because its populism perfected: anti-Wall Street and on the topic of retirement.

The 401k lends itself to greedy management companies. For most uniformed investors, a 401K is intimidating, opaque, and clearly lacking any competition. Thus, they’re a fee trap for management companies because savers who use a 401k are a captive audience.

Even still, the 401k can be a valuable tool. It is a bankruptcy/litigation bombproof wealth shelter, after all.

Here’s how not to get slaughtered by fees

Step 1: Only pay for active management that has a history of generating above-market rates of return. I know this is controversial, but yes, I am one of the few who believe that active management can be worth paying for. For instance, I happily put some of my sister’s 401k in a small cap value fund that was actively managed because it was the only way to build out her portfolio with reasonable exposure to that style. Plus, the management team has a strict adherence to value principles, and I’m a fan of the home team. Let’s go, value investors!

Step 2: Only invest in styles that are worth a hoot. What’s the worst performing fund style in history? Large cap growth. What’s the best performing fund style? Small cap value. The future is highly unlikely to deviate from history. Think about it conceptually. Large cap growth stocks are huge companies with expectations to grow faster than the overall market. Small cap value stocks are tiny companies expected to grow very slowly. Wall Street typically overpays for growth and underestimates value. Hence, large companies expected to grow quickly tend to be the worst values. Small cap value stocks tend to grow, with zero expectations for growth.

Let me pull up a chart:

It’s not even close. Large cap growth basically means “stocks that are pricey and large based on very rosy future expectations that may or may not prove true.” Small cap value basically means “stocks that are cheap and small based on less than rosy future expectations.”

Step 3: Use a brokerage window. Roughly a quarter of all 401k plans have something called a “brokerage window,” whereby you can forego the sponsor’s offerings and select your own stocks, ETFs, and mutual funds. If you have a brokerage window, USE IT. It will be pricey for each trade, but in the long run, the cost savings from saved fees is more than worth it. I’d set it up so that each pay period I were automatically invested in a no-load fund (at the time of purchase or sale) and then each quarter, dump the fund and move the proceeds into a chosen ETF, say SPY – the S&P 500 SDPR.

If you do the above, you can mostly mitigate the effects of higher fees on a 401k. Take the match and the bankruptcy/litigation shelter for what it’s worth. After that, balance your 401k with an IRA, where you can choose what you want with 100% freedom to pick anything, anywhere, at any time.

Wall Street doesn’t have to take your money if you play smart!

I think Bill McBride is undoubtedly one of the best economic forecasters and reporters in the United States. His blog, Calculated Risk, is one of the most popular macroeconomic blogs around, especially for real estate trends.

Like McBride, I think housing is one of the world’s most important economic indicators. Through 2007, the expanding real estate bubble in the United States contributed 75% to America’s GDP growth. Home equity begets more consumer spending, which in an economy where 70% of economic activity is simple and pure consumption, home equity is everything. That’s why I’ve always said we all work for the real estate industry.

In a recent post, McBride shares his view on recent investor interest, which anyone should read. Some interesting tidbits: investors are displacing owner-occupied demand, and investors are making up a greater share of the buying spree in higher value homes. In higher-priced markets like the Bay Area, investors purchased a whopping of 27.3% of all estimated sold homes, up roughly 10% from the year-ago period.

Real Estate Investors Going Nuts!

The market for real estate could not be hotter. Existing home inventory is falling rapidly as owners who are still underwater cannot bring their homes to market and those who are currently holding onto their homes don’t want to sell at a bottom.

Months of supply only modestly increased to 4.7 months in March due to a slightly slower sales pace. Here’s a chart of unadjusted housing inventory:

I think it’s interesting to compare the performance of single family homes to financialized real estate – public REITs that turn a business into a pure investment. Whereas buying your own homes requires work, buying real estate as a REIT requires much less work to find individual properties. Basically, REITs remove the impact of your own labor in the economics of real estate deals, so cash on cash returns are lower.

I don’t own REITs, so when I saw this snapshot of the best performing asset classes from 2009 to the end of 2012, I was shocked:

REITs, as measured by the NAREIT U.S. All Equity Index, have trounced every single asset class from 2010-2012. Furthermore, REITs beat every single asset class in total returns from 1993-2012. In the last 20 years, the best investment was…yup, real estate.

Obviously there are a few macro realities that gave real estate a winning boost:

1. Falling rates – Real estate is, in some sense, a perpetual bond. Finance 101 says rising or falling rates have the most pronounced effects on long-dated fixed-income investments. Perpetual is forever. Thus, real estate valuations are buoyed the most by falling rates.
2. Cheap capital – One of Amazon’s biggest advantages – yeah, I’m going on a tangent – is that its investors love seeing the company compete on price. Amazon raises extraordinarily cheap equity capital that it uses to slaughter rivals on price. REITs have the same advantage in raising cheaper and cheaper capital. Thus, REITs that have a low cost of capital can buy, buy, and buy away, driving up prices as they find plenty of investors willing to participate in secondary offerings to buy more properties.
3. Institutional delay – REITs find it very easy to raise new debt and equity capital. Private real estate investors won’t be getting a bank loan for $100 million any time soon. However, institutional funds are raising multi-billion portfolios for new acquisitions, even in single family homes.

What excites me most about real estate is that it will soon be very transparent, and perhaps more liquid, than it has ever been. A recent spin-off, Silver Bay Realty Trust Corp. (SBY) is still in its infancy, however, as its portfolio matures, it will provide a public proxy by which we can gain insight into the biggest real estate markets in the country.

In due time we’ll know average rental prices, cap rates, vacancies, and capex costs from its portfolio of single family homes around the country. I’m impressed by the company’s financial reporting as it breaks out, in very good detail, the status of its portfolio in its quarterly filings. I really think the data gleaned from a mature Silver Bay portfolio will completely change the game for how we look at and value single family homes since it’ll be the first true pure-play with years of data from several locations around the US.

That kind of detail should only continue to bring more and more investment capital to American real estate. Based on historical norms, real estate still isn’t all that costly. The price to rent ratio is back in line with the pre-bubble levels from the very early 2000s, but still slightly higher than in the 1990s.

This is only just the beginning of a whole new bubble. Here we go again.

So today’s tax day.

In typical fashion, I’m going for a buzzer-beater. I like filing on the last possible day, since I almost always owe at the end of the year.

Here’s what’s on my mind as I look at my 1040:

• AGI is a painful reminder of spending – The year 2012 was full of lifestyle creep. While I had a few less than ordinary expenses that I hadn’t expected, my year-end AGI serves as a reminder that lifestyle creep needs to be kept to a minimum. I spent pretty heavily last summer, and road trips add up. The year 2013 will be no better for big spending. I have to pay for basically 1.5 years of school this year.
• I’m doing okay for a college kid – The economy isn’t as strong as everyone would like for it to be. I need to be more thankful for what I have. I’m not starving, not broke, and I don’t owe a dime to Sally Mae or any of her cohorts. That’s worth something. In general, 20-somethings are in a world of hurt, with student loan delinquencies now over 35% for people under 30 years old. I need to be more aware of the comforts and conveniences I have because it’s never been harder for people my age. Whether its from some supreme being or just dumb luck, I’ll take it. What I cannot do is take it for granted.

A special thanks goes out to Dan at DarwinsMoney and ETFBase, Larry at InvestorJunkie, Corey at 20sFinances, and Robert at TheCollegeInvestor for allowing me the opportunity to write about the markets and finance on their sites. Also, a big thanks to the clients of my non-blogging endeavors.

• I had dividend income? – I generally stay away from dividend-paying stocks. I’m not a fan of dividends, seeing as I think they are more likely to lead to fairly-priced securities than underpriced securities. I had dividend income for the first time that I can remember in a long time. Weird. I think the bulk of it was from a one-time special dividends at year-end 2012.
• W-2 income would be nice – W-2 income is worth the world when you don’t have it. After graduation I look forward to any amount of W-2 income because it’s so undeniably important for buying a home or making big investment moves, like purchasing investment real estate. Ideally, I’d have both W-2 and Schedule C income. A financially-motivated friend of mine just secured a steady job. We have similar goals and financial motivations. I can see us working together on some good real estate purchases in the future.

What about you? Did you glean any new insight from your tax documents?

So I’m in my last year at college, which is strange to say.

After tolerating the boondoggle that is prerequisites in undergrad, I’m finally taking finance classes. It’s all finance from here on out – 30 hours of good ol’ stuff like international finance and principles of good investments.

Intro to corporate finance has been a blast. I never thought I’d learn to love school. I always had a love-hate relationship with it. Finance homework, though? Awesome! P.S. My professor basically admitted that finance professors make six-figures. Talk about a dream job. Pretty cushy, no?

The scariest part is knowing that undergrad probably won’t be the end of school. A bachelors degree is the new high school diploma. MBA? Probably. Hey – Columbia, let’s be friends? Let me cushion my GPA a little bit.

Round Up

Here are some of the articles that caught my eye recently:

• 5 Reasons why bitcoins are the dumbest investment ever – Leave it to Dan to tell you like it is.
• Daily inflation calculator – From my buddy at DQYDJ comes a new fantastic calculator. And apparently I ran into the wrong comments on his post about alcohol and tobacco consumption. No matter – I still think health professionals affect the statistics. Just a thought, guys.
• The stock market is stupid and irrational – 101 Centavos rocks it with this one as he discusses the ridiculously-unprofitable-without-subsidy business that is “green” fuels. Confessional: I’ve made money with this insanity. See the post on why Wall Street hates Monopolies.
• The problem with “buy what you know” – From Financial Uproar, you’ll have to tolerate the off-color commentary, but the idea is sound: buying what you know is dangerous advice because knowing a company as a customer is not knowing a company as an investor.

Stuff I’ve Written Elsewhere

You can find me all around the blogosphere.

At ETFBase, I wrote an article about the death of the 4% rule.

At 20s Finance, I wrote about some of the most famous investors.

At The College Investor, I wrote about the water industry, and whether or not water stocks are a good investment. They’re okay.

Seeking Alpha has a mixed reputation among investors.

On one end, there are very qualified, very astute investors writing excellent articles. On the other hand, there are writers who do little more than calculate financial ratios that can be found readily on MorningStar and compare them to competitors.

It’s hit or miss. A Seeking Alpha article is either exceptional, or terrible – there’s no middle ground.

Until Now?

So Seeking Alpha recently changed its format, offering authors a minimum amount of compensation for articles they deem worthy of their paid “Pro” service. That payment is $100 for regular “Pro” articles, and $500 for “alpha-rich Pro” articles.

To qualify, writers usually have to write an excellent piece on an undiscovered company.

People who pay for “Pro” get these articles direct to their inbox one day earlier than the rest of Seeking Alpha. After 30 days, the article goes back under a paywall. Unless you pay for Pro membership, you’ll have to catch a “Pro” article within the 29 day period that free users can see it.

The Pro service is obviously a way for Seeking Alpha to make more money on its content. There’s nothing wrong with that. But it’s also becoming a way for high-quality ideas to get immediate attention and investor interest.

Basically, it’s a good way to pitch a good idea to investors who are willing to pay for it. And because they’re willing to pay for a Pro membership, one would think they’re also throwing around a fair bit of investment capital.

The point

Investing circles around some kind of chicken and egg problem.

Is investing about being right, or is it about being first?

You could have been first in and out of Enron and made killer money, even though they cooked the books. Likewise, plenty of high-quality companies sell for well below their value to a private owner for years without a catalyst. Being “right” about valuing either firm won’t pay off for either of these two example investments.

Investors have to be wise to look for a stock with a catalyst – something that will force an undervalued stock to rise higher. A stock can only rise in value if other people perceive that it is worth more. You can find high CROIC, low EV/EBITDA names all you want, but without a catalyst, you’ll just own another dog.

Stocks only rise if others see that value in the stock.

Case in point: A stock pick for 2013 rallied quickly after a recent article about it on Seeking Alpha. While I won’t say that the author was the only reason for a high-flying stock price, the fact that the idea was distributed to Pro members certainly couldn’t have hurt. An article that gets pushed out to thousands of serious investors can absolutely drive a stock price higher.

Seeking Alpha just became that way to broadcast a good idea to investors. It’s a create-your-own catalyst service now. And I can get behind that!