Sunday, January 11, 2015

First Round Riches: "The NFL Draft" Stock Picking System

For whatever reason, personal finance is a taboo subject. It's a topic less discussed than politics and religion among most Americans.

And while no one needs to or should know your own individual financial situation, I have to ask one question: Why? What's so wrong about discussing investment ideas amongst friends? What's wrong with talking business? Hell, according to the fantastic book Rich Dad Poor Dad, money management is the primary topic discussed among the wealthy in social situations.

So, I ask: do the wealthy talk money because they are wealthy? Or because they understand wealth and how to generate it, therefore they discuss it among those who understand the language as well?

"Would I talk to my friends about medical issues? No. I trust my doctor. Therefore I will trust my financial planner." This is a common explanation I receive. And here's my rebuttal: it is vitally important for you to understand exactly what your financial planner recommends. No one cares about your money as much as you do. It's always good to receive ideas, but only you should have the confidence to run your portfolio. Allowing a financial planner to put you in anything without you understanding it can be a recipe for disaster. I'm not a financial planner and I don't consider myself a good stock picker. However, if I were talking to a financial planner, I would understand everything they say.

"It's just boring. Sports are more fun and it's not taboo." This is true. Sports discussion is nice because you can have strong opinions without (most of the time) genuinely offending others. Also, sports are a topic that many people have been raised to understand from a young age. Hell, from the moment I could walk, my dad discussed the importance of a level swing of a baseball bat. When you talk sports, you speak English to many other Americans. When talking finance or investments, even when you're speaking English, it may sound like gibberish to those who don't understand.

So, let's make it fun. The challenge is to Keep It Simple, Stupid (KISS), or, if you're a sports-minded individual like me, you'll quote Rex Ryan and say "Keep It Likable and Learnable." (KILL)

And then it hit me: Why not talk about your stock portfolio like you do your fantasy football team? Or better yet: why not grade prospective stocks like potential draft picks? Here's the Likable and Learnable Method to running your portfolio in a language you understand. Let's turn into our own Stock Picking General Managers. This is not investment advice. It is only translation of one language to another.  ONLY YOU CAN DECIDE WHAT ROUNDS TO ASSIGN YOUR STOCKS. But this method allows you to translate stocks into a language you understand as you draft companies into your own "National Portfolio League."

Round 1: Your Round 1 picks are your blue chips. These are the companies that are very polished, have fortress balance sheets, dividends and growth prospects. Think of Apple ($AAPL). Apple is the Andrew Luck of the stock market. Polished as it enters the National Portfolio League yet still a lot of upside for years to come. These are your projected Pro Bowlers. Like any Draft, some first round picks become busts. But the measurables indicate that these are solid investments. These rarely trade at "cheap" valuations, but are worth it because the long-term prospects almost seem like sure things. (please note: There is no such thing as a sure thing.) Think of these as "enterprising stocks." Higher upside than round 2, but bigger downside, and still considered smart choices.

Round 2: Think of Round 2 as a place where you find your "solid starters." Here is where you find your stocks that have paid dividends for years and continue to reward shareholders. Think of AT&T ($T), Verizon ($VZ), Proctor & Gamble (PG), Exxon Mobil ($XOM), Chevron ($CVX), McDonalds ($MCD), etc. You can be very successful with a portfolio consisting solely of Round 2 picks (see: the New England Patriots, who always trade out of the first round and acquire as many Round 2 picks as possible, and in investment terms, search "Dividend Growth Investing"). The difference between a Round 2 pick and a Round 1 pick is there is lower upside, however, with a Round 2 pick, there is lower downside as well. This round has the least risk because this consists primarily of "defensive stocks."

Please note: Round 2 can be substituted by a low-cost Index Fund, which is the smartest thing you can do if you do not want to, or have no interest in managing your own stock portfolio. You will likely outperform the overwhelming majority of at-home "Stock Picking General Managers."

Round 3: Here is how I like to think of Round 3: think of these stocks as stocks with Round 1 talent,  Round 2 characteristics, but they have "off the field" issues. BP ($BP) is the best example of a Round 3 pick. It has Round 1 talent (juicy dividend that's growing, cheap valuation, strong balance sheet), but its "off the field issues" are low oil prices and the lingering legal costs of the 2010 oil spill disaster. You, like an NFL GM, must decide whether or not the off-field issues are largely behind this player in your portfolio, and because you're buying it in the "third round," (read: buying it cheap) it has higher upside than even your first round picks if everything works out, but, your downside is much higher.

Round 4: Round 4 consists of your "momentum" stocks. These are stocks that are trendy and keep going higher. Think of Amazon ($AMZN), Tesla ($TSLA) and Netflix ($NFLX). Hey, these are top performers! Why are these in Round 4 and not Round 1? Here's why: These companies do not pay a dividend and are either VERY expensive or don't make money (in investment terms: the technicals are good, but the fundamentals are bad). Think of these companies as "raw athletes you've heard of on major college teams." They provide extreme boom or bust potential and are extremely risky. 

Rounds 5-7: These are your speculative stocks. These are the ones you take a flyer on hoping for explosive growth. You'll be lucky to get anything in return for these. However, they can be worth it. Who knows? You might find a Tom Brady that keeps your portfolio consisting of otherwise Round 2 picks outperforming every year.

Undrafted Free Agents: Penny stocks. You can find the occasional winner in these but you're probably better off playing a slot machine in Vegas. 

Hopefully this primer better helps the at home investor/sports fan understand stock picking in a language that makes sense. There's a lot more to learn in order to be your own "General Manager," stuff that I learn every day. If you don't feel like you're ready, see the note below Round 2. If you want to learn more, then I suggest reading finance books to fully understand.

Monday, July 14, 2014

Wine, Gold, and Green: Harnessing LeBron's Economic Impact

On Friday, July 11, LeBron James made everything right in the world again. Or, at least, he made everything right again in Northeast Ohio. The anger, frustration and hurt feelings suddenly vanished. The sky suddenly was bluer, the air cleaner, and the overall psyche of the city finally feels a true sense of optimism.

To be able to speak for everyone in Northeast Ohio would be disingenuous at best, arrogant at worst, so all I can do is offer an opinion from the perspective of a 20something professional who will likely someday be faced with the same choice LeBron had to make: to stay or go. You see the writing on the wall and you get upset because you alone can't make a significant enough impact to fix the nonsense around you.

Granted, I am not a professional athlete, nor do I have a celebrity status in Northeast Ohio. If I left, the only people affected would be friends and family. But, LeBron decided to do what may young professionals have done: leave for greener pastures. The circumstances for LeBron were different: in Cleveland, he still would have received a max salary, endorsements and (maybe) the ability to pursue championships in Cleveland. The average 20something professional isn't afforded that luxury. In order to maximize earning potential, professional potential and social status, sometimes the only option for many of us who grew up in Northeast Ohio is to leave.

I have been, and will continue to be very critical of Northeast Ohio's economic development and supposed "rebirth." I don't feel it's happening fast enough, or with the proper level of investment in order to be considered a true comeback city. I say this even with the recent news that the Republican National Convention will call Cleveland home for 2016. There is still a defiant belief among Northeast Ohio's cheerleaders that we have arrived. The fact is, we haven't. There is still a metric ton of work to be done.

I say that as someone who doesn't WANT to leave for greener economic pastures, feels like they HAVE to leave in order to achieve my professional and financial goals. When you compare Cleveland's supposed "rebirth" to the emergence of other cities such as Columbus, Charlotte, Dallas, Atlanta, Denver, so on and so forth, it's really not even close: other areas provide more opportunity for young professionals. However, there is finally hope.

"I feel my calling here goes above basketball. I have a responsibility to lead, in more ways than one, and I take that very seriously. My presence can make a difference in Miami, but I think it can mean more where I’m from. I want kids in Northeast Ohio, like the hundreds of Akron third-graders I sponsor through my foundation, to realize that there’s no better place to grow up. Maybe some of them will come home after college and start a family or open a business. That would make me smile. Our community, which has struggled so much, needs all the talent it can get." - LeBron James

Assuming LeBron means everything he says, that's a powerful message. In order for Northeast Ohio and the Midwest in general to rebound from economic loss we must  have enough people pouring enough investment money into businesses in the region. Sometimes it takes a catalyst for real hope to emerge, and it requires billions of dollars collectively invested in order to spawn a real comeback (see: Dan Gilbert's multiple ventures in the Detroit and Cleveland areas). Such a project is bigger than anything you or I can achieve, because the cost is more than the several thousand dollars a middle class individual can invest alone. (of course, we can crowd source investments, as I stated a few months ago, but such a project still needs leaders with a vision and plan)

LeBron's economic impact as a basketball player is estimated to be $80-100 million annually to Cleveland, but his potential long-term impact as a businessman can be so much more. Who knows what business plans LeBron and his team have for Northeast Ohio. LRMR may only be the beginning. Perhaps other businesspeople in the area can harness the additional downtown traffic for further growth. Maybe it's time to build Phase 2 of the Casino (complete with the dining, retail and overall upscale appearance the current casino lacks), more housing, new public schools, more well lit areas, more power washed buildings, Public Square's beautification project, etc. Our "T-shirt economy" is a nice story, but it's not enough. We need more. Maybe, just maybe, other wealthy individuals who grew up here and left the area to achieve their financial dreams will be inspired to invest in Northeast Ohio.

Between the RNC and LeBron coming home, perhaps a true rebirth for Northeast Ohio is on the horizon.

Here's hoping we can harness the gift we've been given, and back up the narrative Cleveland's cheerleaders have been preaching with real results.

As LeBron said: "In Northeast Ohio, nothing is given, everything is earned." It's time to earn our rebirth, and finally we may have the momentum to do it.