Investing Experiment Wrap-Up

After a year of ten novice investors, ten accounts, and $10,000, we have some RESULTS. Market indexes such as the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite each outpaced the return on investment for the group as a whole. Once the twelve months had passed, the group lost 4.95% of the original $10,000, and most indexes only lost about 1%-1.5% over the same time period.
overview
As you can see, one participant did exceptionally well. Bryan’s boost from February through June was primarily from a well-timed purchased of AMD stock. Another participant did exceptionally poorly, jumping from one losing position to another. As you can see from the graph, most did not break even.

As the organizer of the experiment, I was able to see and track all trades. Now that it’s complete, the following investing fundamentals are now proven once again:
  • Cutting Losses: Never watch an investment of yours continue to drop with the hope that it will bounce back. Once you’ve lost 15%-20%, it is almost certainly time to cut your loss and sell. According to Warren Buffet and Benjamin Graham, cutting your losses is the most important investing concept.
  • Acting on Impulse – The stock market – and most investors – are driven by impulses and short term market news. Taking 24 hours or more before placing a trade will help to alleviate speculative purchases. Many participants changed their minds from one stock to another in a matter of hours.
  • Beating the Market – Only one of the experiment’s participants managed to beat the market, and he did so by buying a risky stock that fluctuates wildly. Especially for novice investors, index funds are your friend. They will keep pace with the market. Why? Because that’s exactly what they are designed to do!

Investing Experiment Kickoff

On July 1st of this year, ten individuals and I kicked off a very unique investing experiment that will last 12 months. Using $10,000 of real money, I allocated $1,000 to each participant to invest how they saw fit. We’ll see who does best (and ask why) after 12 months pass. Although it costs nothing to participate, to better emulate the outcome of real individual investing, profits will be shared with the participants. I will foot the bill for all commissions. On the first of each month, I share a monthly update to all participants showing exactly how their investments are performing.

After less than two months have passed, I’ve observed the following:

  • Participants make trade requests using written communication (not verbal), notably via SMS and Email.
  • Order types (market, limit, etc) vary based on the previous investing expertise of each individual.
  • The only investment that more than one participant purchased was stock in Disney (NYSE: DIS).

The goal for this experiment is not to make money, although that would be a fun bonus. Instead, we aim to analyze participants actions and their investing results. We aim to answer simple questions about individual investing, such as: What triggers an investor to take action? When given $1,000 and zero risk, what do investors buy? What impact does competition have in this group of 10?

Tracking is accomplished using a shared Google Spreadsheet.

Hacking the Amtrak Points System to Travel on the Cheap

If you ride Amtrak more than once per year, I promise you want to read this whole thing. However, the time you will spend clicking, waiting, and transferring points is considerable, so get ready to do a bit of work.

via Wikipedia Creative Commons

 

Amtrak’s Fare Pricing System

Let’s start with some basics, using regular economy-class travel from New York City to Baltimore as an example. The one-way cost between Baltimore and New York City will be around $50 when booked two or more weeks in advance. As is the norm in the travel industry, the cost increases as you approach the travel date. Booking that one-way fare on the same day you plan to travel will be anywhere from $107-$172 (or even more). Let’s take a closer look at Amtrak’s rewards program and their partner relationships to see how we can avoid paying so much (or anything at all) for that expensive fare.

Amtrak Guest Rewards Points

Amtrak points are better than gold to book fares. No matter when you make your reservation, the number of points required is the same. Our NYC to Baltimore economy seat costs 4000 points regardless of whether it is booked 4 weeks or 4 hours in advance. Therefore, 4000 points can be worth $50, and can also be worth $172. Points can be earned from riding the train, completing various promotions with Amtrak partners, purchasing points directly with cash, and transferred from other travel miles and credit card points programs. Clearly, there are plenty of ways to earn Amtrak points – we need to find the best ways to obtain lots of them.

Points from Riding: You earn 2 points per every $1 spent on Amtrak travel. When you ride business class or first class, you earn more points.
Points from Cash: You can buy 500 points from Amtrak for $13.75 (I assume they adjust this price every year or so with the rate of inflation). Since you need 4000 points to book a one-way trip in the Northeast, you’ll need to spend $110 to buy 4000 points outright. That’s a steep price to pay for most destinations, but it also brings up an important point – if you are looking at any Northeast fare more than $110, buy the 4000 points outright to book the ticket! Why pay $172 in cash for a seat that you can book using 4000 points purchased for $110?
Points from Promotions: Several simple marketing offers will earn you more Amtrak Guest Rewards Points. Most of these require that you spend money on something, such as a hotels, flights, or department store goods. Some don’t. One promotion for Metlife can be completed annually and earns you 500 Amtrak Points for simply calling to get a car insurance quote. The updated list of these promotions can be found on the Amtrak Guest Rewards website under “Earn.”
Points from Transfers: Many hotel, airline, car rental, and credit card loyalty programs will allow you to transfer points from one program to another. Based on some quick math, the transfer rate is very good between these programs. For example, transferring 4000 Chase Ultimate Rewards points – equal to $40 in cashback from Chase – to 4000 Amtrak Guest Rewards Points is an incredible advantage to Amtrak travelers. Remember, those Chase points can be used to book Amtrak fares worth hundreds of dollars after the conversion. Also, those points from Chase accrue from you using your card regularly at no cost to you, so after you transfer them to Amtrak, you’d be riding Amtrak for free!

Summary and Closing Notes

  • For any Northeast fare that costs more than $110, buy 4000 Amtrak points for $110 and book the fare using those points.
  • Many transfers, conversions, and redemptions with Amtrak points take 4-6 weeks to process, so be sure to allow adequate time for the points to show up in your account.
  • In order to change a reservation made with points, you need to cancel the booking, and then re-book with the points again. There is no ‘modifying’ the reservations made with points.
  • Amtrak Guest Rewards Program’s customer service is AWESOME. The service level is better in my humble opinion than that of many Fortune 500 companies. They are available 7 days a week from 5am-midnight Eastern Time (GMT+4/5): 1-800-307-5000.

This article was written in July 2014 and may not account for changes in Amtrak’s policies or Guest Rewards Program. Please feel free to ask any questions in the comments and I will try to answer as best I can.

Pinnacle Engineering – Ignite Baltimore 14 Conference

At heart I’m an engineer. One of my favorite ways to screen suck on the internet is to review the biggest buildings, bridges, ships, and planes. For Ignite Baltimore 14, I pitched a presentation about gigantic, “Megatall” skyscrapers – how they are built, the challenges preventing their construction, and which Megatalls stand as the tallest in the world today.

Pinnacle Engineering began by describing our current golden age of engineering. As of 2014, eight out of the top ten tallest buildings in the world were each built within the last ten years. There are many companies and plans vying for a chance to join these ranks, but a long list of factors prevent more skyscrapers from breaking ground. Skyscrapers must withstand natural disasters like hurricanes, earthquakes, and floods, and even non-natural disasters like terrorism. Those engineering challenges, combined with the local laws, zoning regulations, and cost, are part of a long list of reasons why skyscrapers are not more common. 

The United States pioneered this engineering era with the Empire State Building in New York City. The Empire State Building stood as the world’s tallest building for ~40 years, and was the first building in the world with over 100 floors. Present day, much of the Megatall building construction occurs in the Middle East and Asia.

  • As of 2014, the tallest building in the world is the Burj Khalifa in Dubai. Reaching over a half-mile into the sky with over 160 floors, you can tell from the design that the benefactors were clearly aiming for the “world’s tallest” title.
  • The Makkah Royal Clock Tower Hotel in the holy Saudi city of Mecca is the tallest hotel in the world with 120 floors. It overlooks the Kaaba – the black cube building that Muslims all over the world face when praying.
  • One World Trade Center was completed in 2013, and stands at a symbolic 1776 ft. It is one of seven skyscrapers in the new World Trade Center complex. Two and Three WTC are planned to be built within the next few years, along with the 9/11 memorial/museum and new transportation hub.
  • In Taiwan, the Megatall Taipei 101 held the title of the world’s tallest from 2004-2010, but now it has dropped all the way to the 5th tallest in the world, which gives a sense of how golden this golden age of Pinnacle Engineering is. The Taipei 101 incorporates traditional Asian design elements, and features a 728 ton steel mass dampener between the 87th and 92nd floors. The dampener, suspended on a pendulum, acts as a counterweight during earthquakes.

Another engineering technology that is gaining popularity is prefabrication. Similar to building a Jenga or Lego tower, prefabricated buildings complete each building component offsite, and then ship the pieces to the building’s location for assembly. Prefabrication has shortened the amount of time it takes to build from months to just days. A prefabrication example I touched on in the talk was a 30-story hotel in China built in just 15 days. You can watch a time-lapse of the hotel’s construction on YouTube here.

Baltimore also has some significant skyscraper development on the horizon. Baltimore city approved a controversial billion-dollar Harbor Point development project between the Harbor East and Fells Point areas of the city. The tallest building will reach a height of 350 ft, and the complex will feature the new headquarters of Exelon Corporation, the same company that recently acquired Constellation Energy and BGE (Baltimore Gas & Electric). I closed the presentation with a mind-blowing comparison of Shanghai’s skyline in 1990 and its skyline in 2010. As you can see below, the change is incredible.

Shanghai-1990-vs-2010

 

Wikipedia is an absolutely great reference for well-organized, up-to-date skyscraper information. Check out the list of the tallest buildings in the world on Wikipedia here. Click the video below to view the presentation on YouTube. 

Finding Value And Consistency In Consolidated Water Co.

Consolidated Water Co. Ltd. (CWCO) is a tiny company, with a market cap of only $172mm. As of its latest quarterly report ending Q3 2013, Consolidated Water was trading at 0.8x the value of net working capital. Over the past few years, CWCO has traded well under book value, but remains a small, relatively undiscovered stock. For those looking to diversify into a teeny utility company, Consolidated Water is certainly worth a look.

The stock is much more volatile than most utilities. Consolidated Water’s high beta of 1.5 is surprising, but not necessarily a deterrent. The high beta may be attributed to the small size of the company, enabling any investor with substantial buying power to push the stock up or down. The stock prices of significantly larger utility companies like American Water Works (AWK) and California Water Service Group (CWT) fluctuate much less, with lower betas of 0.29 and 0.42, respectively.

Other fundamentals that provide key insights are the P/E around 15 and the percentage of institutional ownership at 49%. As with other companies in the water supply sector…

—> To continue reading, please see the article on Seeking Alpha, where it was published. 

How the Stock Exchange Works

I subscribe to the Visual.ly weekly newsletter, which highlights excellent representations of data. As the name suggests, Visual.ly is a community of artists and designers who make data beautiful and easy to digest. Periodically the community branches out of their typical info-graphics (pictures) and into videos. This week, they sent out an excellent video how the stock exchange works:

Investing for the Average Person – Ignite Baltimore 13 Conference

Copyright Bruce F Press PhotographyEarlier this year, the Ignite Baltimore Conference Organizers selected my pitch for the 13th Ignite Baltimore Conference. Ignite Conferences are similar to TED talks – both provide a medium for passionate presenters to share their ideas. The format of Ignite is very rigid, and certainly lives up to the tagline, “Enlighten us, but make it quick.” Each speaker has five minutes to present 20 slides which advance automatically every 15 seconds. As a speaker, planning and practicing with this format in mind is essential.

My presentation, Investing for the Average Person, covered some misunderstandings, intimidation factors, and a simple investing example using index funds. The internet provides a multitude of ways to invest instead of leaving money to grow at a snail’s pace in a bank savings account. However, lacking financial education at all levels leaves many young people unprepared to navigate the countless number of investment products available to them. For the most part, much of the investing world focuses on more information than the average person needs to know. For basic investing, many people can disregard terms like derivatives, options, futures, shows like Jim Cramer’s Mad Money, and worries about large risks. The average person can largely ignore many of these distracting terms and media that is mostly focused on short term market news.

The example I presented demonstrated how an American named Sally could plan, save, and invest in index funds – a type of mutual fund – to finance a purchase of a new car. This example is not exclusive to a car, and could be applied to support retirement, a property, or savings toward a degree. Sally’s first step is to plan her investment. How much does she need for her car? Are there investment minimums she must save up to before investing? Questions like these will help Sally shape her investment planning. Once she has saved the needed funds, she invests her money and largely relaxes.

Sally planned to put half of her dollars into a stock index fund (such as ticker VGTSX), and half of her dollars into a bond index fund (such as ticker VBMFX). This plan is called a target investment allocation. Instead of picking a few stocks, investing in index funds diversifies Sally’s investment over hundreds of industries and sectors, which lowers her potential risk. For an average investor who does not care to analyze detailed earnings reports and study financial news, index funds are ideal. The only action Sally may need to take as her investment matures is to re-balance her investment back to the 50/50 target she initially planned. Sticking to her plan will help her stay on track and achieve her goal of a new car.

As I wrapped up, I touched on a few important concepts an average person should be familiar with: capital gains taxes, keeping a personal financial ledger, and inflation [Investopedia links]. With this basic knowledge, an average person will gain the confidence and organizational skills to invest their money and achieve their financial goals.