Monthly Archives: December 2013

Visionary Grandparents Compound Interest

Compound interest is the 8th wonder of the world” – Albert Einstein.

I’m not sure he actually said it, but an urban legend says so…

Anyway, you have to see some examples to really appreciate this wonder.

Suppose you have $1,000 to invest and you receive 10% interest on your investment every year. This means that after one year you get $100 and the total amount you have is $1,100.

You use this $100 to celebrate and know that next year you’ll have another $100, this is like magic, the mithical cornucopia or in English – horn of plenty. A little horn of plenty but still, you get $100 every year from this investment of $1,000. If you do it for more than 10 years you’ll actually get back the full investment and more money indefinitely!
Cornucopia Basket Vegetable Horn
Nice. Now let’s see what happens if you decide not to spend the $100 you got from the first year and add it to the investment.

The second year starts with $1,100 and at the end of the second year you get 10% of this amount or $110.

This is more than the $100 you got the first year, you could say it’s not such a big difference and you disregard the hole thing. I mean, you could use those $100 a year ago and what do you get for not spending them right then? A measly 10 bucks?

That’s the thing with compound interest, it is deceptive. You really need to swim against the currents to make it work. The world’s largest religion is against you (consumerism). A lot of people start with great intentions and plan to use compound interest to their favor only to be swept by the forces of life.

Imagine if your grandparents opened a modest investment account for you when your father was born. I know this is a weird idea but stay with me for just a few moments.

They knew it takes a lot of time or a lot of money to really free someone from the chains of modern slavery in a day job.

They decided to invest $100 each month for each of their yet unborn grandchildren. They studied the investment world and found a combination of investments that gave them 10% a year.

I know that $100 many years ago was much more valuable than $100 today, let’s pretend this is an inflation free world or that they didn’t actually invest $100 but the equivalent of today’s $100 with a smaller amount and the 10% they earn on their investment was a bit more to adjust the story.

So at the end of the first year they have $1,200 they start earning the 10% only after each whole year to simplify the calculation.

Let me now pull out a spreadsheet and show you how much you get as a gift when you’re 35 years old and they started 25 years before you were born.

The spreadsheet is here.

 At 35 you will be so wealthy you wouldn’t believe it. You’ll have more than 3 million dollars!

Now, don’t blame your grandparents for not doing anything with this information, they probably didn’t read this blog back at the time, it didn’t exist 60 years ago. I know it’s hard to imagine but actually the internet itself didn’t exist.

So instead of bitching about your bad luck with your grandparents who didn’t set you out in life (which is a common reaction), the official moral of the story is –

.

.

.

You’re that grandparent.

MasterCard Split To Boost Adoption Of This Great Stock

My first submission to SeekingAlpha is pending approval!

Here is a short synopsys,

Mastercard (MA) announced a 10:1 stock split to reduce it’s share price while increasing the number of shares.

This happened last week and was well received by the market. The stock was at $765 before the news is at the neighborhood of $800 in the 7 trading days after the news, about a 4% increase.

The reasoning is that small independent investors will find it easier to directly invest in Mastercard. Today the market share of .

Mastercard is a great company, all of its vital signs are positive. It did have a challenging year back in 2008 but it’s improving ever since.

Lets look at some of the 5 year growth numbers as compared to its main competitor, Visa (V).

Company Market cap Dividend 5y EPS growth rate Return on assets (5 yr avg) Return on equity (5 yr avg)
Mastercard Inc 96B 0.55% 22 18% 36%
Visa Inc 138B 0.74% 53 9% 13%

Both companies are performing very well. Mastercard’s dividend which got a large boost of 83% in that same announcement is still lower than Visa. This is good, it gives Mastercard room to grow even more in the future.

For the rest of the article, you’ll have to wait until it is published over there!

Bitcoin short term future

So, will the Bitcoin move up or down?

It’s hard to tell. Some claim the down trend is over while others are mocking the optimism and say the down trend pressure will continue until the end of January 2014.

btc-dn

Many discuss the news coming from China, trying to analyze if it’s really as bad as people say it is. This is difficult because of the language barrier. If you’re a chinese speaker, please write in the comment section what is really being said, preferably with links to chinese web sites.

Here are two disagreeing charts, one with a strong up trend and another with a strong down trend. They were both taken from MtGox data a few minutes ago.

Can you tell why this total disagreement and confusion in the discussion?

Before looking at the trend in the chart, you must make it a habit to look at the axes. The time axis at the bottom is very important.

In the First chart, you see that the time range is of a few days. This is not enough (in my opinion) to get a meaningful idea about the probable future of the trend.

At least we can see that the down trend continues for a few days now.

On the other chart, you can see that the time range is much smaller, it is less than one hour actually.
btc-up
I heard some people are happy with this picture and believe the worst is behind us. This is too short sighted, the down trend might resume in a few hours or days. No one can be sure this is the final bottom.

Sometimes, when you’re trying to convince yourself this is the end of the down trend, you will actually buy at the top (temporary top) and will suffer losses as the down trend resumes.

In the long run, 5 years and above, I’m extremely bullish on Bitcoin. My plan hasn’t changed, I’m putting a same $ amount into bitcoin each month so if it is cheaper, I get more bitcoins for my dollars.

I try not to play the short term trading game, I’m just not too good at it.

When I do spot unusual scenarios I write about them and take action, but only with a small part of my investment.

I really wish there was a way to invest in options on BTCUSD and when I say options, I mean plain vanilla options, like stock options, not binary options – that’s a big no-no in my book.

Things will get interesting when options exchanges will offer those kind of product but I guess it will take time for that to materialize.

Meanwhile, I’m back to finding great stock option opportunities. Read more about it here.

Simplest Profitable Options Strategy

Let me start with a magic trick, you see, I’m a psychic.crystal-ball-black-28785-smaller

I say: “Investing in options”

And I know what you’re thinking! Let me just wave my wand and close my eyes for a few seconds while I concentrate…

You think I’m crazy, no, no, you think the best way to make money in the stock market is to keep your money away from it.

You think, investing in options? He probably meant to say Trading, or more appropriately, Speculating because you don’t invest in options, that doesn’t make sense.

Ok, maybe you didn’t think all those thoughts exactly. It’s hard to use my psychic powers over the internet while you’re probably on a different continent and a different time zone.

But I really don’t want to get into a discussion on definitions of investing vs. trading vs. speculating.

My personal definition of investing if you choose to accept it, at least for this discussion is simply putting some money from your savings at risk on a financial instrument with the expectation of earning some more money. Time investment should be kept to a minimum, you’re busy as it is already. Preferably the investment should be low risk, so you don’t have restless nights worrying you might wake up and realize it’s all gone.

Since I want to reveal the simplest profitable options strategy, I will say outright, I won’t have space here to teach the whole intricate world of options and I will skim quickly over some parts so you don’t get glazed eyes and hit the back button.

So, first thing you have to know is that stocks are going to increase in value.

Well, since I just broke my crystal ball and the new one hasn’t arrived yet, all I can say is you should consult the greatest investors of all time. You know one of the names I’m going to drop, right?

Mr. Warren Buffett is a successful long term investor and he uses options too sometimes. I studied and I follow his methods and you should too.

Rule number one, by Phil Town is an easy to follow book with some short cuts on the subject of finding low cost investments in high quality companies.

High quality, not in the nice products or services, but in their profitability and growth and their track record of at least 5 years.

Low cost means they were neglected temporarily by the media or hysterically sold due to over reaction by the crowds in the stock market.

These are companies you should track. There aren’t many of those but when you find them, you’d better keep an eye on.

At chartly.com I write from time to time about special opportunities like these. And I’m not talking about opportunities that go away minutes after they occur. This anomaly in the stock market can last for days or weeks, sometimes months.

So, what to do once you spot these gems you wonder?

The simplest idea is to outright buy the stock with a portion of your investment money. But that’s too boring, everyone understands that already…

What I propose is to use a simple call option on the stock.

What’s so simple about this? You might ask. Well, many beginners make mistakes and buy cheap options with the hope of making an insane killing using options and some actually have beginner’s luck. Most don’t.

Instead of buying the cheapest call option available, which isn’t worth much, you should buy an option with a long time until expiration.

Yes these are more expensive, but there’s a reason for that extra cost. You might actually increase your chance of profiting with those.

Another variable to take into account is the strike price of the option. The lower it is, the more expensive the option will be.

Why am I going for the expensive options?

If the strike price of the option on expiration day, is below the stock price, you get the difference! If it’s above, you lose!

But that’s in the distant future. Right now, when you’re buying the call option and there is plenty of time to expiration, the deeper the option, the better for you. That’s because for every dollar the stock moves, the deep in the money option moves close to a dollar. Not so with out of the money options.

Yes, yes, I know, it’s more complicated than that. There is volatility and interest rates and many additional complex subjects to cover. But I’m running out of room here on my sheet of paper and we should leave some for another day.

You won’t be able to increase your leverage 100 fold, but 5 is plenty. Just remember to use this on investment ideas with a time horizon of about one year.

P.S. If you like this, you can read a more detailed explanation with real examples on my special report here.

Bitcoin ready for a correction

December 7th 2013 update
December 11th 2013 update
Bitcoin has gone up fast in November 2013 and now in early December it might give you an opportunity to buy at lower prices again.

I’m generally bullish on Bitcoin. I learned about it in April 2013 when it crossed $100 for the first time and studied the idea thoroughly. I was convinced and still am that it has a long way to go and will be worth much more than it is worth at the moment.

But, as this web site is dedicated to a combination of high quality stocks and options, this is a rare post outside of the normal scope.

The reason for this post is that I heard some friends say they consider selling some bitcoins at the moment. To take some profits. I am in it for the long run, I bought bitcoins and still buy using dollar cost averaging to accumulate bitcoins.

Screenshot from 2013-12-04 15:50:41

The daily candlestick chart of bitcoin vs. the USD on Mt.Gox looked very familiar to me and convinced me to sell some bitcoins, if and when the value drops a bit, I will buy back more bitcoins.

The high of $1242 from 6 days ago is tested again today. If you look at

the MACD-Histogram, you will see that it is not matching the pattern of the price movement, it is steadily declining.
Don’t take me wrong, I sold only a small part of my bitcoin holdings as an amusement ride. Most of my position is a long bitcoin one.This is a classical divergence and could be a sign that the bitcoin price is about to drop sharply to $800 or maybe even lower, this is the level of the lowest price in between the two high prices 4 days ago.

I will be amused if the drop in price will trigger a media frenzy where they will call it an instable asset, not suitable as a currency and too risky to use in any way. This may actually help the down movement I anticipate here.
rough a rapid up trend similar to November 2013 to the next level.Later on, the media will neglect bitcoin and it will stabilize around a new level, at the neighborhood of $1000 for a year or less, then it will go th

What do you think will happen to the price in the coming days and weeks?

—– Update December 7th 2013 ——

btcusd-dbltop-success

Well, I hate to say I told you so, but it has crossed $800 and stayed below it a significant amount of time. It actually reached $650 for a brief moment and is hovering at $700 in the past 5 hours.

That’s what I like about doing technical analysis on low frequency charts. I have time to react without being myopic and glued to the screen minute by minute.

—– Update December 11th 2013 ——

No image this time, I’m sorry. Many people ask me did we reach the bottom, or what does my technical analysis tells me now and why don’t I share it with you all?

Well, the sad truth is – I don’t know. I do know a lot about technical analysis but most of it is bullshit…

The rare situations where technical analysis can tell me something with a high enough reliability, that’s when I write about it.

In the long run, I believe bitcoin will go up by a large margin. In the short term, patience and sticking to one’s plan is the best course of action.