Investment U Course Open Q&A Call February 25

First off I'll be talking about a few books on this call. All great investors are avid readers so I'll be recommending a book or two I know is excellent for your progress each month.

Book #1: Is my companion primer to the course that fills in gaps and is a very easy ready The Worry Free Wealth Guide to Stock Market Investing

Book #2: Is The Ivy Portfolio

Get them both at Amazon.com.

I finally have the advanced stock trading package organized for you with a full $500 off offer exclusive to Investment U course students.

Now the first answer I want to give you comes from last week concerning the Ivy Portfolio recommended by Steve Sjuggerud at http://www.dailywealth.com/archive/2009/oct/2009_oct_02.asp

I purchased the book and created a 15 minute video here to help you understand the very simple concept behind this return enhancing system:

http://www.tradementors.com/tntstocks

STUDENT QUESTION

Dear Dr. Brown,

I live in the strongest economy in the Eurozone – Germany. A major portion of my portfolio is in Euros. The stronger and more responsible economies (not just Germany) want to get rid of the PIIGS, although I realize this may not be possible.

How can I best preserve and increase the value of my portfolio in the face of uncertain times, a weaker Euro and incompetent politicians who only tell half truths?

Please reconsider coming to Austria in November!

DOC BROWN ANSWER

You have to become very aware of the major trend on the EUR. Right now it is down! That makes the USD the safer currency as long as the trend remains down. You can only see the major trend on a long term monthly chart like this one…

This also means that as long as the USD is in a long term strengthening cycle a foreign investor could hold the Gone Fishing Portfolio in USD over the length of the cycle. Remember that currencies cycle for 5 to 7 years as you can see in the long term monthly chart above.

This also mitigates the stink of the PIGS. (PIGS = Portugal, Italy, Greece, and Spain).

Ps. You’ll have to campaign Oxford Club to get me over to Austria…I’m up for it but you’ll have to create the demand over there.

Pps. Back the PIGS isn’t it funny how the Romans used to be civilized and the Germans used to be barbarians. Now roles are reversed!

Ppps. I am teaching you to forecast currency rates since it impacts your stock investing. I am not implying in any way that you should trade Forex! Just make sure you understand how this analysis impacts stocks.

http://www.tradementors.com/disclaimer.htm

STUDENT QUESTION

Hi Dr. Brown:

I am relatively new to your program and I have two questions:

1.) Can you speak more in depth about scalability? You mention it in
passing in the course, but I couldn't
understand what it was or how to use it as an analysis tool.

2.) I came across a stock-ticker symbol CAST. The stock had some
clustered insider buying on Jan. 5th of
almost $5 million. It seems like a promising candidate for a buy. Would
you be willing to do an analysis for me based on the criteria in your
course so I have a better understand of how to go about the process?

DOC BROWN ANSWER

First of all congratulations on taking the initiative to find a stock with insider buying. You're showing the signs of becoming a great stock investor. I have answered your question about CAST in a video for you here since it is such a good question:

http://www.tradementors.com/tntstocks

I ALWAYS do an initial chart analysis on EVERY stock I consider buying. The videos should help you understand how I shift back and forth between monthly and daily charts.

Concerning scalability could you give me the course page number so I can read what I wrote. Scalability means a number of things and I need to see the passage. I simply don't have time to go back and re-read my entire course to find the passage. Give me the reference for the next call and I will give you the right answer! Thanks again for that great question on CAST!

STUDENT QUESTION

Page 206 in the course says that occasionally insiders can sell off optioned stock and use the cash to buy it right back and you said it is powerful....I didn't get that. Isn't owning optioned stock the same as owning the stock bought on the secondary market? How can it be 'powerful'?

DOC BROWN ANSWER

Holding the option is NOT the same as owning the stock. Employee Stock Option (ESO) Plans come with restrictions and limits on the length of time the executive is vested. That means that if the executive exercises the option to avoid expiration of the ESO and doesn’t sell the stock for cash that he or she very strongly believes in future appreciation of the stock. The idea here is that by watching the executive’s action you can get inside his or her head a little.

STUDENT QUESTION

Hey Scott,

Are the stock options (those given to insiders) the same ones as the options traded in the regular options market? Does the insider stock option itself have any value or gain value only after it is exercised? What are the characteristics of insider stock options?

DOC BROWN ANSWER

Another great question from another astute student!

No they are not. Employee Stock Options (ESOs) do not trade on the open market. They are options specific to a single employee that have to be exercised into actual shares. ESOs have value and can be priced (dirty inside executives tried to convince the SEC and FASB that they couldn’t be priced. This really raised Warren Buffet’s ire. Now the SEC requires that corporations price their ESOs. ESO plans are tailored by executive compensation committees and absurdly overpriced “consultants” to the final negotiation between the top executive and the board of directors. This is an enormously corrupt practice in general in corporate America today that siphons billions of dollars from shareholders to incompetent executives. Evidence of this is in the Banking packages post TARP funding.

STUDENT QUESTION

When the IPO lock up period ends, why do some IPO prices go up? Does it mean the insiders are let free to buy too? I got the point that insiders can't sell their shares till then but you said it could be a good IPO if it jumps after the end of lock up period. Do you mean to say that people wait to see if anyone is dumping shares and then buy?

DOC BROWN ANSWER

The lock up period also restricts the flow of information from the company to the market. If the price jumps it means that the insiders almost certainly decided to hold onto their shares instead of dumping. And if they know the stock is good you know that institutional have been tipped off as well. So it becomes a positive feedback cascade.

STUDENT QUESTION

Hi! Doc Brown:
I am interested in the hedge fund & its portfolio managing. On the last session you briefly mention about hedge fund trading.

I understand the hedge fund can be engaged in all type of trading like Forex/Currency, Futures, Stock, Bond, Index, Option, ETF, ETN, Treasury, Muni, etc.

Could you explain about hedge fund & its tax consequence or efficiency in more details?
Where can I register if it is required? and what requirement do I meet in order to start a hedge fund company and become a portfolio manager?

Thanks

DOC BROWN ANSWER

If you’re planning on creating a hedge fund I STRONGLY recommend that you attend the 2010 Investment U conference in San Diego. Try to talk with Robert Williams who has an enormous institutional trading background. It is imperative that you ferret out the best package of legal and financial services so that your hedge fund is properly structured from the start. Bob will know some good directions for you to take or who you might talk to who is good out there today. Don’t forget that the cost of the conference will be a tax deduction for your fund so don’t hesitate in attending.

STUDENT QUESTION

I've noticed that the question of where to start when investing from scratch comes up a lot, and The Gone Fishin' Portfolio is always Dr. Brown's response. Keep in mind that those of us small investors literally starting from scratch do not have the capital to start with the GFP, and perhaps not even the ETF version (which you can only find if you buy the book). However, I believe there's an alternative. The Permanent Portfolio Fund (PRPFX) could be considered the "poor man's Gone Fishin' Portfolio" --- it's intrinsically asset-allocated, tax-efficient, costs only $1000 to open, and you can avoid all the transaction fees if you buy it direct or through Scottrade. It has been recommended in the Investment U newsletter on a couple occasions as a great way to get started. (Look in Archives for "The Peace of Mind Fund" issue #773.) It gets top scores from Morningstar, Lipper Leaders, and MAXfunds.com, among others. After that's set up, perhaps dollar-cost-averaging in to IPOs or momentum stocks might be a way to get going when you have so little to start with. While the GFP is fantastic, it's simply out of reach for those of us who are truly starting from scratch. Hope this helps those in the same boat.

DOC BROWN ANSWER

Yes! PRPFX is an excellent alternative if you’re starting out on limited funds. This was such a good question I added the answer to the second video at:

http://www.tradementors.com/tntstocks

Also, here’s the article referred to in this question:

http://www.investmentu.com/IUEL/2008/March/permanent-portfolio-fund.html

STUDENT QUESTION

Dr. Brown,

I've been trying to methodically track the signals (your "prairie dog squeaks") for Momentum stocks and have a few questions.

1. In determining Market Share Leadership for a given stock, if I understand correctly, we're to write down the EnterpriseValue/Revenue figures for each competitor, add them all up (including for the stock we're analyzing?), then divide the EnterpriseValue/Revenue of our stock by the total. Is that correct? I can't seem to find an explanation of what this number we've calculated tells us. Please clarify.

DOC BROWN ANSWER

Depending on whether you pull the book or market value for Enterprise Value this gives you a ratio called book-to-sales or market-to-sales. The idea here is that the ratios controls for company size so that you can see who really dominates the product or service market the company serves. This is useful since large corporations often have many products in different markets and industries.

STUDENT QUESTION

2. For Double-Digit ROE, you say to use 5-year averages as compared to its rivals. How do we do this?

DOC BROWN ANSWER

In addition to Yahoo Finance I really like Market Watch for this kind of data. You pull each year’s fiqure for Total Net Income (which is after tax) off the income statement. Here’s an example with IBM showing data back to 2005:

http://www.marketwatch.com/investing/stock/ibm/financials

Then pull the figures for total equity (Shareholder’s equity) for each year off the balance sheet. Again for IBM:

http://www.marketwatch.com/investing/stock/ibm/financials/balance-sheet

STUDENT QUESTION

3. In filtering out stocks that don't meet the momentum criteria, it appears that only Earnings Acceleration, Institutional Ownership, Industry Leadership, and Technical Indicators need to be tracked over time, and that the stock can simply be given a "pass/fail grade" for each of the remaining signals. Is this correct?

DOC BROWN ANSWER

There is definitely a point where your research passes from quantitative to qualitative. So a pass/fail grade is definitely a good idea. Then track the stocks that pass for ones that are moving (1) in an up-trend or (2) have given a technical signal that the down-trend is turning up. I show you how to do this with a 12 month moving average crossover in the videos I created for you here:

http://www.tradementors.com/tntstocks

STUDENT QUESTION

4. For the signals that need to be tracked, how often should this be done --- once a quarter?

DOC BROWN ANSWER

There are two facets to this question. For every stock that passes your screen you should create a tracking system like the TnT books in the videos here

http://www.tradementors.com/tntstocks

When you do get an entry signal with a good technical indicator like the 12 month moving average cross-over OR the TnT Bulls and Bears up arrow you can double check if the stock fails to move up in price accordingly. Otherwise you should re-check the fundamentals of your watch list quarterly and cull any of your stocks you downgrade from pass to fail.

STUDENT QUESTION

5. In order to be considered a Momentum Stock, how many of your "prairie dog squeak" signals must it pass: 80%, 90% 100%?

I may have more questions next time as I work through this, but this is enough for now. Thank you for your time and clarification.

DOC BROWN ANSWER

Remember that with momentum stocks the proof is ALL on the price chart. Momentum means that the stock is up-trending steadily. You will often get reactions (drawbacks) but the stock should shortly resume. Earnings growth and surprises are a key component that you should check first. The other factors are gravy. Then WATCH THE CHART LIKE A HAWK as I teach you in these videos:

http://www.tradementors.com/tntstocks

STUDENT QUESTION

Dear Investment U Staff / Dr. Brown,

during the last month I sent you three mails with several (admittedly extensive) questions.
"Comments for Doc Brown concerning lesson 1-3"
I realistically didn't expect Dr. Brown to answer all of them (that would have taken up to
much time) but I would have thought that he would at least mention them and/or say that
he will address them at a later time. Or something like that. Instead he completely ignored
them. So, I have to ask now if/when he intends to answer/comment them.
I am aware that Dr. Brown has a very busy life, but as one of his "students" I am eager to
hear those answers, comments and opinions.
And by the way... Congratulations on the new book. I am looking forward to read it.
Also thanks for your efforts in regard of the TnT-BnB package. :)

DOC BROWN ANSWER

I think I know which questions you mean. I assure you I miss-read or missed the questions I did not answer. I will answer question even if I don’t know the answer to direct you to an expert or resource who does. Please do me a favor and resubmit the question summarizing in a short list at the top. I don’t mind long questions. It’s just that sometimes I get lost in the length! Thanks for the support on the book!

STUDENT QUESTION

In the last conference call Scott mentioned that there was a discount to the TNT software for iucourse students. Could you tell me how much it costs and how to order?

DOC BROWN ANSWER

You can order it here:

http://www.tradementors.com/tntstocks

I have arranged a $500 discount available ONLY to Investment U students. Also, when the new Autopilot Stock Trading feature comes out you will get that at no additional charge. The Autopilot will allow you to set up your watch list and have the program automatically buy and sell with presets even if you are asleep and the market is on the other side of the world!

STUDENT QUESTION

I have found that using drive time to listen to audio books and podcasts a great way to learn about investing. I call it the University of Prius. I purchased from Investment U. See second item: http://www.investmentu.com/new-book-store.html and it has been valuable resource. In it you gave a talk on “How To Supercharge your $1,000,000 Portfolio with Option’s!”. Could you post the power point presentation on this talk? Also you mentioned that Timothy Crack suggests selling options and using trading pairs with stock. The idea was to moving in and out of a long or short position as needed to hedge against price fluctuations since the commissions on stocks and the buy sell spread is so much lower. I bought Tim’s book Basic Black-Scholes: Option Pricing and Trading, but skimming the book found nothing on trading pairs. Can you tell me where to find more on this subject?

DOC BROWN ANSWER

Go Prius U (you should create a sports pennant)! I attend the University of Ford Ranger!

I was talking about Para-trading. Here’s a download link for the presentation entitled Understanding Stock Options:

http://stocks6969archive.s3.amazonaws.com/5881277685984969.ppt

Remind me for the next call and I’ll try to do a video on stock option paratrading and will post it at:

http://www.tradementors.com/tntstocks

But you have to remind me next month with a question.

STUDENT QUESTION

Is there a new SEC rule allowing brokerages to freeze money market mutual funds? Is it true that the rule does NOT apply to banks?

DOC BROWN ANSWER

The problem is with the institutionals not the small investor. So you shouldn’t have a problem with having your cash sweep trapped in the money market.

I couldn’t find anything on the new rule and don’t know if it applies to banks. But here’s the background argument that led to the new rule:

Note: See http://www.financial-planning.com/news/industry-sec-spar-money-funds-2662006-1.html

That’s it folks! Don’t forget to watch the videos on Technical Analsysis of Stocks here:

http://www.tradementors.com/tntstocks