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Posts from the ‘Investing’ Category


200 Million iPads Update

UPDATE 2012-04-24: My March estimate of 11.8 million was accurate. I’ve added a link below and updated the image to reflect the change.

UPDATE 2012-08-01: My July estimate of 23.3 million was way off. Like Asymco says, “It’s perhaps unrealistic to expect 150% growth for more than one year.”

Back in September, I estimated that Apple would sell 200 million iPads by the end of 2012. It looks like I was a little too optimistic.

Apple just reported stellar quarterly results. However, iPad sales growth was not quite as strong as Apple’s initial sales seemed to indicate. Two years after introduction, the iPad is selling better than the iPhone did two years after its debut. But it looks like it may take one extra quarter for Apple to hit 200 million iPads.

Actual Results

Estimated iPad sales through 2012

Estimated Results

  • Jan to Mar 2012: 11.8 million (this was accurate)
  • Apr to Jun 2012: 23.3 million (actual amount was 17.0 million)
  • Jul to Sep 2012: 28.0 million
  • Oct to Dec 2012: 38.9 million
  • Jan to Mar 2013: 29.8 million (was 29.9 due to rounding differences)

Disclosure: I own AAPL stock.


How to Value Stock Options

During my career, I’ve worked for five startups, one larger company and one startup that was acquired by a large company. I was offered or promised stock options each time I joined a new company except once. I didn’t know what they were worth, so I usually discounted them when making a decision.

It turns out that the most likely value of stock options in a startup is zero. Things do work out sometimes. And when they do, it can be great. But mostly they don’t. Options at an already-public company are a different matter since you can be sure you’ll be able to sell your stock eventually.

Here is my rule of thumb for estimating the value of stock options at a public company:

Value = Number of Shares * Exercise Price * .4

For example, if the company’s share price is $10 and the grant is for 1,000 shares, the approximate value is 1,000 * $10 * .4 = $4,000. Since options typically vest over four years, I would count this grant as $1,000 per year for four years. This assumes I don’t sell any of my shares until the end of the four years.

The .4 factor comes from estimating how much the company’s stock price will go up over the next four years. From 1871 through July 2009, the S&P 500 Index has gained 8.7% per year which, if compounded annually, gives you about 40% over four years.

Of course, life doesn’t always happen as planned. This rule helps me figure out a reasonable estimate of value so that I can make a decision and move on.

UPDATE: Ironman at Political Calculations, created a nice calculator based on my thoughts and added some insightful comments.


Who Do You Listen To?

Those at work know I can be easily distracted into a discussion on the economy and the desperate attempts of our political leaders to avoid being (rightfully) blamed for the catastrophe. I read quite a bit of economic and financial commentary, so I thought I’d list the people whose comments and advice I trust.

I’ve followed most of them for months and had a chance to see how their predictions turned out. All of their past articles are available for review too. It’s hard to argue with someone who is consistently accurate in evaluating current events.

Of course, not everyone on the list agrees all the time, which is good. Reading dissenting opinions from time to time can help clear your mind. My past investment in silver, for example, would’ve turned out much better if I’d been paying attention to more than one writer.

So, here they are:

I read everything these guys write. Only Mish is hard to keep up with. :-)

UPDATE: I’ve decided to remove Peter Schiff from my list after reading about Peter’s results for 2008. I haven’t been reading Peter for very long, but he’s been wrong for all of last year. Here is the most telling line from the article:

In other words, Schiff failed where it matters most: Peter Schiff did not protect his client’s assets.

I used to have a big investment silver. I sold it after reading a different article by Mish that talked about leverage and commodity prices during a recession. I wish I’d read and acted on it sooner.

My basic test for an adviser, columnist, economist or other financial adviser is whether their advice helps me make money and avoid losing it. After learning more about Peter’s recent track record, I no longer feel comfortable recommending him.


The U.S. Financial System Is Broken

I’ve been reading Mike “Mish” Shedlock’s economic commentary for a while now. This comment struck me as something that would be very funny if things weren’t so serious:

If you were by any chance wondering why mortgage rates were not following the Fed’s slash and burn policy of lower rates, the…short answer is rising default risk.

But let’s not be too gloomy here.

Other than overleverage, bad debts, sinking home prices, no jobs, shrinking wages, cash strapped US consumers, rising oil prices, a sinking US dollar, $500 trillion in derivatives not marked to market, rampant overcapacity, underfunded pension plans, looming boomer retirements, no funding for Medicaid, no funding for Medicare, and no Social Security trust fund, everything is just fine.

The fact that (I believe) we’re heading into a recession has made me reconsider many of my investment strategies. I know that in the very long-run, the market will do well. But why take the hit of staying in the market during a stock market crash if you know one is coming?

There aren’t many types of investments that do well in a recession. I believe silver will be one of them (up over 33% year-to-date). Others include CDs and Treasuries.

I’m also going to be saving up as much cash as I can, for two reasons:

  1. In case I lose my job, and
  2. To be able to buy investments for cheap when things are really bad.

Newsletter and Fiveplex

I wanted to write a quick update to let everyone know we are still getting the finishing touches on our newsletter. Well, actually, we’re still writing parts of it. Last year’s Christmas letter became a New Year’s letter, and this year it’s looking like we’ll have to rush to avoid it becoming a Valentine’s letter.

Payson Five-plex

We also closed on our first “for keeps” investment property. It’s a five-plex in Payson about 20 minutes from our house. It’s a bit of a fixer-upper, but the price was low and the numbers worked out, even counting some needed repairs. And the best thing is that I find I enjoy being a landlord. I like talking to the tenants and hope to make the building a great place to live. Of course, I haven’t had any calls in the middle of the night yet. So we’ll see how things go.


Why Silver

I got a rare chance to see both my brothers and their families this last weekend. It was great talking to them both and catching up. I didn’t get much of a chance to bond with Owen or Tia. But Kristy’s family was very generous. It was great to experience Texas hospitality again. Scott and I went to see a movie that neither Kristy nor Cheryl would’ve wanted to see: I Am Legend. It was fairly good, but made me jumpy later that night.

Dave and Carly stayed the night in order to cut an hour or so off their drive back to Phoenix the next day. Little Addison is growing up quickly, even since I saw her at Thanksgiving. And I discovered that Dave has also considered buying silver as an investment. Since I purchased some silver recently, I wanted to write a bit about why and how I did it.

First, silver is a precious metal and has often been used as money at various times in history. Second, it is an industrial metal used to make stuff. Third, we’re using more silver than we’re digging up — the amount of above-ground silver has decreased by 90% over the last 60 years. Fourth, the current price doesn’t reflect the increasing scarcity. Fifth, there are now several convenient ways to own it. Theodore Butler has written a great article describing the reasons to own silver in more detail.

There is now an exchange traded fund (like a mutual fund, but traded in real-time instead of at the end of each day) that specializes in owning silver. Apparently, there is an ETF for oil too, but I haven’t looked into that.

I also wanted to take physical possession of some silver. I did quite a bit of research and price comparisons and ended up buying American Silver Eagle coins from Bullion Direct. The coins are minted by the U.S. Mint and are trusted to have very high quality. The coins cost a bit more than raw silver does, but are easily recognized and should therefore be easy to sell or trade when the time comes.


Review: Rich Dad, Poor Dad

The book Rich Dad, Poor Dad, written by Robert Kiyosaki, was the first book I read on the subject of investing. I’ve never thought of it as an incredibly well-written book, but it did get me thinking about money.

The three most valuable lessons I learned from reading Rich Dad, Poor Dad are:

  1. Assets make you money. Liabilities cost you money. To be rich, buy assets and avoid liabilities.
  2. Most decisions about money are driven by the emotions of fear and desire. Learn to make rational decisions.
  3. The more I know about something, the less risky my decisions become.

I believe these are incredibly valuable lessons to have learned. Notice, however, that I didn’t say anything about real estate. There is quite a bit about real estate and owning your own business in the book, but there isn’t really enough to act on. In fact, this was somewhat frustrating. I purchased two more of his books and his CashFlow 101 game, which I really like. The books started to get repetitive, so I stopped buying them.

Today, I stumbled on a thoroughly researched criticism of the book and it’s author by John Reed. Reed argues extensively that Kiyosaki is making up some of the major stories in the book and giving dangerous advice in others. I found his arguments and evidence pretty convincing.

However, I needed to learn those lessons. And it was better to do it by reading someone else’s experiences than to learn it myself the hard way. I still like the book, but would like to find a better one to recommend — one that doesn’t have ethical issues.

In the meantime, Rich Dad, Poor Dad is still one of the best books on higher-level thinking about finances and money. When I find a better book, I’ll be sure to mention it.


How to Save for Retirement

I’ve been thinking about retirement and making some changes to our investments, and it occurred to me that most of the financial advisers out there have got it wrong when it comes to retirement. For example, David Bach, author of The Automatic Millionaire, talks quite a bit about saving for retirement using a 401(k) as if that were the point. Sadly, this is confusing the means with the end.

The phrase “save for retirement” generally mean spending less than you earn and putting the left over cash into some form of account targeted at retirement, such as a 401(k), IRA, or Roth IRA. But saving money isn’t really the point. The real goal is to live comfortably during retirement when you can no longer work to earn an income. Or in other words, to collect enough passive income to live on.

One (overly hard) way to do this is to save a bunch of money in a bank account, and then just live off of the principle. This isn’t the best because it requires a lot of cash. Investing the principle and living off the interest costs less because you’re earning interest on the unused principle. And if you’re going to invest, you might as well invest now when the consequences of a market dip or making a mistake aren’t quite as serious. This is how we got government sponsored retirement accounts.

But the right goal is not to save money or contribute to a retirement account, which are means to an income during retirement. The right goal is to create a stream of passive income on which you can live. A Roth IRA does meet that goal, but there are easier ways that require less cash. That is one reason for my interest in investing in real estate and starting a business, but anything that puts money in your pocket each month will work. The best thing is that, by buying or creating the right assets now, I can “retire” the moment my passive income is enough to meet my needs.

So I’m trying to find and buy assets that put money in my pocket each month without requiring work on my part. I’ve had to learn a lot, and I’ve made mistakes, but I’m optimistic about making things work during retirement. I only mention this because it just occurred to me today how the mantra “save for retirement” has set so many people on the wrong track.


Keeping Apple

Apple introduced a new line of iPods yesterday, including a touch sensitive one that is basically an iPhone without the phone. However, the stock price dropped about 7% since the announcement. Why? Apple also cut the price of the iPhone by $200, or about one third. And that will hurt Apple’s profit margins.

Since I recently mentioned that I was keeping Apple and selling JetBlue stock, I just wanted to say that I wish I had money to buy more of Apple. I think their decision to go for market share by dropping the price will be very good for Apple in the long run. The stock price drop shows how short-sighted many investors are. I see this as a buying opportunity.

Despite being on target to sell their millionth iPhone this month, it looks like Apple is going to go for market share over profit margins in the cell phone market. Steve believes Apple made a mistake in the early years when, instead of pushing prices down and going for market dominance, it kept prices high, earned lots of money for a while and then lost most of their market share (and profits). Apple is still recovering from that mistake.

This time Apple is going to go after as much market share as they can. Their short-term profits are going to take a hit, but Apple is gaining a long-term, recurring stream of income. From all accounts, people love their iPhones and are very likely to keep using them. And Apple gets a cut of the monthly payments each customer is making to AT&T.

As for putting all my investment money into Apple, I’m going to follow Andrew Carnegie’s and Warren Buffet’s advice to keep all my eggs in one basket and then watch that basket closely.


Selling JetBlue

I few months ago, I purchased shares of JetBlue. The stock is down 12% or so since I bought, and I’ve decided to sell. I’ll be “locking in” a loss, but I need some cash to help pay for finishing our yard and had to choose between selling JetBlue and selling Apple. And I think Apple is a better deal.

I still think JetBlue is at the bottom of a cycle and will be up over $15 by next summer. However, I’ve decided to stay with Apple. They are announcing new products and services like crazy. And they seem to be the only major company that has figured out that making things people want to buy is a good strategy.

So, I’m keeping my winner and selling my loser. If I’m right about JetBlue, it should grow about 50%. Apple has about the same potential (which would put it over $200/share), but is more certain. I guess it seems more certain because I understand Apple and it’s market a lot better. Besides, don’t you love your iPod? And your Mac? And your iPhone?