Eclectic Investor Choosing the best investment strategies that fit your strengths Tue, 21 Jan 2014 14:31:07 +0000 en-US hourly 1 Crossing the street blindfolded Tue, 21 Jan 2014 13:34:00 +0000 Dennis Chen

Have you ever considered crossing a busy street blindfolded while talking on your cellphone? This is what a lot of investors do during their investing life. Some get to cross the street unharmed due to dumb luck, but most will get side swiped and bruised, and some will even get run over and never recover.

There are 3 things I suggest doing before crossing the street blindfolded.

1) Understand your environment. Ask questions. Find out what has happened to people that crossed the street blindfolded. Ask the ones that got bruised, how did it feel to get hit by a car? Ask the relatives of the dead ones, what happened when the truck ran the loved one over. Understand the consequences. Find out at what times there is less traffic.

2) Get a guide dog. People that are too busy to invest should just hire someone to assist them. If you can’t pause the business phone call while crossing the street blindfolded, make sure you have a very good guide dog.

3) Take off the blind fold. Finish that business phone call before crossing. Listen for cars. Look at both sides of the street. Confirm that the no cars are coming from either side. Then cross.

Some investors are not aware of the risks they take when they invest, taking unnecessary risks and blowing up. Other investors are very risk averse and decide to never invest. This is similar to a blindfolded person standing the rain not wanting to cross the street and get to shelter. They might be worse off doing nothing. The rain might become a thunderstorm and she might get hit by lightning, or catch pneumonia.

This is what you should do as an eclectic investor:

1) Asses the investment environment. Understand the risk you are taking and the potential reward.

2) Hire advisors, if you lack the time and focus. Have investment portfolio overseen by professional investors. This will allow you to focus on your business. Or use you advisors to learn how to cross the busy streets (those options and futures you don’t understand).

3) Always be learning. Take off the blindfold. Improve you investment system. Have an investment checklist; this is the equivalent to looking both ways before crossing the street.

The takeaway from this post is that there is always a street to cross where you cannot see or hear anything. Be aware of those streets, and figure out if they are worth crossing. If they are make sure you improve you odds of crossing successfully: research, hire guides, and cross the street.

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Finding Time to Invest Wed, 15 Jan 2014 11:02:00 +0000 Dennis Chen

I’m currently going thru a period where I’m very stretched for time. My days seem to go by very quickly. One of the things I realized is necessary to be a good eclectic investor is to have the luxury of time.

I don’t know what your situation is; you might have a job that takes up a 1/3 of your day, and the rest which takes up another 1/3 of your day. This leaves you only with 1/3 of a day (8 hours) for family exercise, eating, education, entertainment, transportation and other matters.

Where do you find time to invest? I basically quit my corporate job and freed up a whole 1/3 of a day. However, I know some people might not be as courageous to do that kind of move. Here is a list of suggestions on where to find time to invest:

1) Become more efficient at absorbing information. Take a speed reading class.

2) Use your commute time effectively. Listen to audio books.

3) Use your exercise time. Listen to audio books or watch CNBC or think about potential investments.

4) Use your vacations and be curious about businesses. When travelling on vacation, take some time to look around. See how business is done in other countries. Take a tour of a factory (Boeing gives tours to their 777 factory in Seattle)

5) Learn from your work. You probably get a lot of new ideas while at work. Just make sure that you don’t use any inside information, or have conflict of interest with your employer.

6) Wake up at 5am. This gets you to an extra hour or so, and will force you to not spend time watching late night TV.

I hope this was useful. Sorry, my time has run out. Thanks for reading. Please post any questions in the comment section. Happy eclectic investing.

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Your investment style Mon, 06 Jan 2014 02:34:00 +0000 Dennis Chen

Happy New Year!  I apologize for not writing more in the past couple of weeks.   I’ve been quite busy doing some eclectic investing.   I can’t tell you what I’ve been investing in right now since I signed a non-disclosure agreement.

This year, I have a lot of things going on.   I’m working on improving the returns at my hedge fund, also the undisclosed investment where I’m an activist board member, and writing the new book.    I’m planning on writing shorter blog posts but hopefully more often.

The morning I was reflecting on the different investment styles and how they develop.   I think it has to do with your level of patience and risk tolerance.   

When I was in my 20’s I wanted to make money fast, I was a aggressive growth investor.  I used to seek out risks.   I was greedy.  

In my 30’s I became more balanced in my approach, I had just gotten burned big time (i.e. I lost money in the first internet boom and bust).   I was still in the equity markets, but was also investing in small businesses.   I had quit my corporate job.     I also dabbled in real estate.  

Now in my 40’s I’ve transformed again into a more eclectic investor.   I am now versed in multiple investment vehicles: real estate, small businesses, equities, options and commodities.   I would probably label myself as a value and growth investor now.   I seek out undervalued investments and growth at reasonable prices.   

It helps to reflect on your pasts investments periods and identify the kind of investment styles you’ve done in the past.   Find out in which you feel most comfortable, and which you really don’t like.   If you haven’t tried something, then try to learn it.    To be eclectic you should try to be good at different styles of investing.     I was just listening to “How to Fail at Almost Everything And Still Win Big” by Scott Adams the creator of the Dilbert cartoon.  He says that he wasn’t great at anything, just good at enough complementary things that when combined made him successful.      

In investing, you should be good enough in several investment areas that when combined makes you a solid investor.  

I’d appreciate your comments.   Let me know if you ‘d like me to elaborate some more on the investment styles.  I realize that this isn’t my best writing, but it will have to do for now as I don’t have much time.    I’m ready for a great 2014.

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Holiday Investing Sat, 21 Dec 2013 11:31:00 +0000 Dennis Chen

This is probably your busiest time of the year.  There are many distractions requiring your time: parties, shopping, decorating your home, etc.   One of the most enjoyable to me is to find new investment ideas for the new year.    A lot of investors take this time to evaluate their portfolios, prune out the positions that didn’t work and replace them with new ones.   

I like to think that the new year is a new opportunity to make money.   I would start with a blank piece of paper and outline a brand new portfolio.  Then I’d imagine that I’m starting from scratch using only my brain and all the knowledge I’ve gain throughout the year.    Usually this is done in a quiet place, no computers, no noise, just me.      Once I’ve done the outline and selected my positions I would compare them to my existing portfolio.   This is when the research and decision making begin.  

I’d review each position in detail, updating my research and opinions about each investment positions.   Next, I’d prioritize the existing and new ideas.    Finally, I’d select the top 20 investments to keep for the New Year.  

I’ve effectively proposed new investments that I’ve seen thru the year and matched them against the current positions in the portfolio.   This process helps me prune the portfolio and keep it updated with new ideas.

I’ll be going thru this process the last week of the year.    If you’d like to see my list for 2014 please post request in the comment section and I might shared them in a post (if I get enough request).

Thanks for reading.   

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Pruning your portfolio Fri, 06 Dec 2013 22:38:00 +0000 Dennis Chen

I’m the kind of person who has trouble letting go of things.   In the investment world you must be methodical and calculating.  Never get attached to your investments.   Make sure you have a process to prune the nonperforming positions and replace them with investments that could provide you better returns.

To prune my portfolio, I would take the list of active positions and analyzed them one by one.  The questions I ask when pruning are:

1) Would I invest in this position if I didn’t own it currently.

2) How much would it cost me (in taxes and transaction cost) to replace the position with something better.

3) Is there anything better out there to replace the position.

I suggest pruning your portfolios once a year.  A good time to prune your investment portfolio is the end of year holiday season.   You can take some time to reflect on the year and evaluate your portfolios.   I usually do this over a weekend in December.    For more active portfolios you might want to prune you positions quarterly, however remember that there might be tax consequences.

Please post any questions in the comment section.

Thanks for reading.   Have a great day.  

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Avoiding Ignorance Thu, 21 Nov 2013 13:52:00 +0000 Dennis Chen

I was at a board meeting the other day and someone reminded me of a quote that one of my former bosses at Bain & Co., Harry Strachan, used to say: “You don’t know what you don’t know”.

When going you are facing the unknown like a new business, new investment, a trip to a new place, getting married or having a surgery, it is best to try do some research. Try to avoid situations than could blind side you.

Things to do to avoid ignorance

· Use Google (you can access information about almost anything nowadays)

· Read a book (or several books) on the subject

· Talk to people who have gone thru similar situations

· Hire experts ($100 spent on an expert will avoid a $1,000 worth of mistakes)

· Be inquisitive, be curious, live a little

Ignorance is very costly to the investor. Make sure you do your due diligence before investing in anything. Do you remember Enron? Just like in marriage, try to learn as much about the person you plan to marriage before you do. By the way, if you are going to be living in the same city as your in-laws, it is probably best to get to know them also, otherwise you might get a big surprise.

I could go on and on about the benefits of not being ignorant, but I bet you can come up with this on your own.

Just remember, you should be careful, don’t be too arrogant. You just don’t know what you don’t know.

Thanks for reading. Have a great day.

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Eclectic Learning – Absorbing knowledge like a sponge Sun, 10 Nov 2013 12:22:00 +0000 Dennis Chen

Have you ever wondered why some people learn things faster than others? It has to do with your brain power and also the amount of body of knowledge one can use to relate to new concepts. Maybe you can’t control the amount of brain power you were born with, but you can definitely work on the amount of concepts you know. As you become an eclectic investor you should strive to acquire knowledge and wisdom from multiple sources. You should be like a learning sponge, constantly absorbing useful knowledge from many places.

The investment world always changes, and you need to be able to understand it. For example, how would you explain a company like Twitter. In order to do so you must be able to draw analogies from your current knowledge base. Let’s see, it is a messaging system that allows you to send messages that are up to 140 characters long, like the old text paging systems. But they can be broadcasted to multiple people at the same time, like e-mail to multiple recipients. How do they make money? Do they charge for this service like the old paging companies? Do they have advertising revenues like Google? The point is that the larger your pool of knowledge the easier it is to build analogies and the easier it is to learn new things.

When I started college I was studying computer science the idea that I was going to program computer games. I was somewhat put off by the amount of classes that didn’t have anything to do with programming. I had to take classes in Texas Government (I studied in U. Texas and it was compulsory), English composition, history and other liberal arts classes. I was able to take a class named “The History of Rock and Roll” as an elective though, it was a blast. Were all these classes valuable to me? At the time I didn’t think so, but know I am glad that I was exposed to so many different bodies of knowledge. It has helped me assimilate new things very quickly. I learned how to learn. I learned to not be afraid of learning new things, no matter the subject area. The ability to quickly learn has been a skill I’ve used throughout my entire career as a computer scientist, a business consultant, a small business owner, publisher, author and money manager.

Just recently, I stumbled across the word “polymath” while watching TV. It hadn’t heard this word since I took the SAT. I now realize that ever since college, I’ve been trying to become a polymath. Here’s the definition of polymath taken form Wikipedia:

A polymath (Greek: πολυμαθής, polymathēs, "having learned much"), is a person whose expertise spans a significant number of different subject areas; such a person is known to draw on complex bodies of knowledge to solve specific problems.

I’d suggest you read the biography of one of my favorite polymaths, Benjamin Franklin. He was one of the founding fathers of the USA and the founder of my alma matter, The University of Pennsylvania. He was also a leading author, printer, business man, political theorist, politician, postmaster, scientist, musician, inventor, satirist, civic activist, statesman, and diplomat. You can learn a lot of about money management from him.

I strongly believe that being a polymath would help you become a better investor. Seek constantly to add to your body of knowledge. Absorb knowledge like a sponge. Be eclectic in your learning and in time you will convert that knowledge into wisdom.

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Constant Improvement – Apple iPad Air Sat, 02 Nov 2013 20:20:00 +0000 Dennis Chen

The 5th generation of the Apple iPad just went on sale yesterday. I can’t wait to get ahold of one. I still have my iPad 1st generation and it still gets used. Apple created and defined the tablet market. Now, 4 generations later, we get the iPad Air. It’s thinner, lighter and faster. Ok, what else? Hmmm, not much has changed in terms of functionality since my first iPad. Then again, what has changed in automobile technology in the last 40 years? Cars still have 4 wheels, an engine that generates power to propel them over roads. The engine might be electric now, but it is still an engine. What’s different in cars is the design, more modern engines and the interior features. Maybe, they can drive themselves (Google Car), but they still have 4 wheels, have an engine and still move on roads. Same happens with Apple’s tablets; the iPad Air is still is a tablet like its first generation, except it is now thinner, lighter and a faster. Is it innovative? Not anymore. Would it sell? We’ll know this X’mas season. My bet is that it will. I want one.

Is Apple losing its mojo because it hasn’t built a tablet killer yet? Has Ferrari or Porsche lost their mojo because they haven’t built cars that can fly? As an investor, I say it doesn’t matter. There will be next Google, Apple, Starbucks, etc. There will always be new investment ideas. There always is constant improvement in any marketplace. If businesses don’t improve constantly they will be replaced by others that do. There are always killer apps being invented. But for now Apple still is the king of tablets, and they will still be making a pretty penny until someone invents the next tablet killer. So, enjoy the upgrades, go out and buy an iPad Air.

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Where’s this market going? Mon, 28 Oct 2013 02:26:00 +0000 Dennis Chen

I’d ask, what’s the timeframe?    As I write this post, Sunday  October 27, 2013, the S&P 500 futures are at all-time highs 1760.   The market is up 22% for the year, so far.   At this point, I can say that in the short term it looks like it is going up, in the long term the market naturally goes up because businesses are supposed to make money. However, in between all the going up, there will be a time that the market will go down or at least go sideways.

As an eclectic investor the key is to figure out how to make money in this environment. The VIX, which is the measure of volatility of the S&P500 is at 13. The range has been between 12 and 22 this year. Most people take the VIX to indicate the fear of level of the market. It seems that at 13, being at the lower part of the range, the market is expecting things to be calm the rest of the year.

From my perspective, I’d be cautious. I’ve been cautious all year and the market has been outperforming my portfolio. It is very difficult to predict the market. If it were easy I’d be super rich. Is it time to turn bullish? Have you ever been at a craps table that has been on a roll for 60 minutes, and you are expecting that 7 to kill the roll? That is how a feel about this market.

The earning season has been a mixed bag. Boing reported a great quarter, while Caterpillar reported a horrible one. Also, the stocks that are the innovators, like Apple, are not anymore. Apple came out with a new line of iPads this week. The new iPads are faster and lighter, yawn, that’s it? Where is the next killer app?

What is driving this market up? Maybe it is the feeling that the market has taken off, and you are being left behind. All those hedge fund managers trying to play catch up. Maybe some individual investors that are just getting the news that the market is going up. Of course we can’t leave out all the cash that the Fed has injected and is still injecting in the system.

At some point the market will stop going up for a while. The Fed will take away the punch bowl. The hedge funds will run out of funds to invest and will want to cash out their chips. This is just when the individual investor will start coming in to the market. So, as an individual investor, be careful out there. Don’t start betting your life savings on a craps table that has been on a roll for over an hour. You can bet a little though because you never know.

Thanks for reading. Have an eclectic investing week.

P.S. By the way, I apologize for not posting last week. I’ve been super busy on several projects. I’m going to reduce my writing schedule temporarily to once a week for the next couple of weeks. Look out for some videos and quotes I’ll be posting instead.

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The Importance of Budgeting Tue, 15 Oct 2013 02:26:00 +0000 Dennis Chen

A friend of mine who is starting a business asked me what to do to not fail. There are many things she needs to have in place in order to succeed. Things like having the right target market, the right product or service, being able to deliver that product or service, great customer service, and an efficient back office. However, I believe that making a budget is an essential exercise to avoid failure. Maybe not succeed, but avoid failure.

Here are six reasons for creating a business budget:

1. Provides you a framework

Creating a budget provides a framework to the business leader. When building the budget, one must imagine all the processes in the business and pinpoint where money will be spent and received. This helps you identify key drivers and helps you set targets.

2. Forecast revenues

A key item of a budget is the sales forecast. This is as much of an art as it is science. There are many ways to forecast sales. The two main approaches are top down and bottom up forecasting. Bottom up (role up) forecast is where each member of the sales team provides his or her forecast, from the field, and the numbers are summed up. The top down is based on a macro view of the business. The drivers are more economic driven, i.e. interest rates, GDP, growth of the industry, growth in number of competitors, etc. It is usually suggested to be conservative with sales forecast. Usually, the top down estimates are used to check the bottom up ones. Usually, the sales teams are overly optimistic. Top down and bottoms up forecasts should be in the same order of magnitude.

3. Controls spending

The budget (annually and quarterly) is important in establishing spending controls in any size business. Unless the environment or business strategy has drastically changed, your costs should be within the budgets parameters. If your costs are not within the budget, it indicates that something is wrong. If your costs are too high, there might be employee stealing or mismanagement. If costs are too low, you might be underinvesting which will impact the future growth of the business.

4. Provides a profit margin

Staying within your budget provides you a profit margin. When you have a good idea of your revenues and can control your costs, you are guaranteed a profit. If not you shouldn’t be in business. Of course non-profit organizations will budget with the goal to break even. However, non-profits measure other type of results and should use the budget process to measure their efficiency and effectiveness.

5. Helps communicate priorities

By having a budget you can communicate with employees and partners the priorities. For example, if expanding internationally is a priority, then there should be funds allocated to opening a new office offshore. If customer service is important, there should be an allocation to training and development.

6. It gives you a score card to beat

Monitoring the business against the budget (monthly, quarterly and annually) gives you a target to beat. The budget is the dashboard or score card that tells if your business is performing above or below expectations. If you make $1MM in profits in the quarter but were expecting $2MM you are underperforming, but if you were expecting $0.5MM you are exceeding expectations. The budget gives you that target to shoot for.

Here are the steps to budgeting

· Have a strategic plan (multi-year)

· Set annual business goals (to support the strategic plan)

· Forecast revenues

· Forecast fixed costs

· Forecast variable cost

· Forecast profit

· Approve and commit to the budget

· Monitor and review

· Deal with variances

We’ll review the steps to building a budget in detail in a future post. Please post any comments or questions to the comment section of the blog.

Thanks for reading.

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