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John Gazy

I graduated from college in 1992 with a degree in information technology. Upon graduation I worked as an information systems consultant for the next nine years. I was involved mainly in developing Windows-based client/server applications. During that period, the late 90�s, I also became interested in the stock market. My interest really intensified in the early 2000s for a couple of reasons.

The technological boom of course has greatly contri...

 
Best Mutual Funds to Invest In
April 23,2008
A nice recommendation for investors in this volatile market would be to invest long-term in one or several mutual funds. As advised by the Money Magazine, those funds should also offer some strategy relevant for current market state.

Dollar-cost averaging

Dollar-cost averaging is a nice strategy of adding a set amount to a portfolio at regular intervals. It will allow you to score more shares when prices are down, to reduce your overall cost and, more important, to lower the amount the market has to rebound to get you back to even. The best way to implement this strategy is to invest in a broadly diversified stock fund that has very low annual costs and allows you to contribute small amounts at a time.



Vanguard Total Stock Market Index Fund (VTSMX) hits the target: it tracks a broad cross section of the U.S. stock market (from large-cap to small-cap shares); annual expenses are less than one-sixth of a percentage point vs. more than a full point for the typical blue-chip fund. And once you've opened your account with $3,000 or more, it accepts periodic installments as small as $100.



Current income

Dividends can be a nice source of current income, and you can find some high-yield investment opportunities among mutual funds as well. The SPDR S&P; Dividend ETF (SDY) offers the best balance between diversification (only a third of its holdings are financial stocks) and yield (it pays more than 3.7%).



Real bargain

Historically, municipal bonds yield about 20% less than comparable Treasuries because muni income is largely federal-tax-free. But due to panic in the credit markets, five-year triple-A-rated munis were recently yielding about 20% more than Treasuries, or 3.03%.

While high-quality munis are very safe, Vanguard Intermediate-Term Tax-Exempt (VWITX) is more diversified than its peers - making it even safer - for a mere 0.15% in annual expenses.
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Stock Picking Rules
April 21,2008
This topic might seem too familiar to you, but as long as investors keep making mistakes, they will need to repeat the lesson of how to pick successful stocks. Moreover, the Fool guys� rules which I am disclosing below are for picking stocks with potential to grow. When I say grow, I mean hundreds percent over years, just like in examples below.

Company 10-Year Return
Frontier Oil (NYSE: FTO) 1,345%
Comtech Telecommunications (Nasdaq: CMTL) 1,693%
Pool Corp. (Nasdaq: POOL) 594%
Potash (NYSE: POT) 1,385%
Jos A. Bank (Nasdaq: JOSB) 667%
Suncor Energy (NYSE: SU) 1,206%
Rio Tinto (NYSE: RTP) 1,129%

This table shows sweet return figures, but the chart below of one of the companies, Potash Corp., is even more impressive.



So here are six rules to pick successful companies. I bet you know all of them but put together, they make a long-chased secret to picking great companies at their starting bottom. The first three rules work exactly against you, no doubt.
  1. "If so many people are talking about this company, it must be a winner!" Simple talking doesn�t mean anything. You invest your own money so you should make sure this is a great company instead of simply listening to what people say. Popular stocks are often high on hype and low on substance, which leads to excessive losses.
  2. "The stock price doesn't matter -- this company's got unlimited potential!" The stock prize does matter, and you should have known it by now. Good investors know that there are prices they shouldn't pay, even for the best companies.
  3. "Getting in on the greatest stocks is the best way to maximize my returns!" Invest in business, not in stocks. Stocks are just papers on the market, led by many factors, and you need a fundamentally strong business that creates value for its customers and shareholders.
Following these ideas brings you to either poor companies or to good ones right after they have risen in value. So here are more rules to find good companies before they inevitably go up.
  1. Look for high-quality unknown companies with low market capitalizations (typically less than $1 billion).
  2. Look for companies with strong insider ownership, robust financial results (profits and cash flow), and evidence of solid management.
  3. Compare the enterprise value (EV) of the company with its growth prospects.
All of these rules are part of investment philosophies of Warren Buffet and Peter Lynch, and I was not going to reveal anything new or unexpected. I just wanted to remind you that good old rules still work and bring great returns to those who don�t neglect them.
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Should Stock Analysts Be Trusted?
April 18,2008
Today, no public company can promote its stock without analysts� opinions or ratings. However, who rates analysts themselves? How can you know whether their estimations are correct and trustworthy?

Recently I came across a post on an investment blog discussing this matter. There are two sides to the issue. On one side, there is a research by U.S. economists stating that securities analysts who are good at stock picking tend to outperform other analysts in a long run. On the other hand, there is this guy Stephen T. McClellan, a Wall Street analyst with 32 years of experience, who writes that many �analysts� forecast� are actually a made-up scam. So where does the truth lie?

Personally, I trust researchers because all the time and efforts spent and data reviewed would make no sense if the results were untrue. So Michael B. Mikhail from Arizona State, Beverly R. Walter from Northwestern and Richard B. Willis from Vanderbilt University have driven the following conclusion in connection with stock analysts: �Analysts whose recommendation revisions earned the most (least) positive excess returns in the past continue to outperform (underperform) other analysts in the future� A trading strategy taking long (short) positions in recommendation upgrades (downgrades) conditional on an analyst�s prior performance generates excess returns, but these returns are insufficient to cover transaction costs.� Thus, successful stock analysts could be trusted but still you can�t rely on their forecasts completely.

On the other hand, statistics provided by the abovementioned Wall Street analyst (I hope it is real stats) proves that Street research firms generate their forecasts only for the sake of cash compensation. �For years, the Wall Street Journal published a quarterly dartboard contest. The expert stock selections by analysts and portfolio managers did no better than those picked randomly.� Or this one: �Charles Schwab rates stocks A to F. From May 2002 through Oct. 2003, its F-rated names, those deemed to have the poorest prospects, performed the best of any category, ahead 30%.� And another one: �A website featuring a newsletter called the �Paradox Investor� assessed the performance of all Sell- and Hold-rated stocks on the Street for a two-year period ending in the fall of 2003. This portfolio of negatively viewed stocks gained 53.5%, more than 75 percentage points better than the market. When stocks have several Sell recommendations, there is nowhere else for that stock to go but up. Once the fourth or fifth Sell opinion is issued on a stock, it is probably ready to recover. Analysts are usually late and are also copycats. Mutual fund money managers are no great shakes either.�

So who should we trust? Stock analysts who do their job daily, researchers who performed a scrupulous study or the experienced Wall Street guy who states all these ratings are valueless? Well, if I gave you an answer, it would be way too simple. Probably, making your own decisions on stocks and investments would be the best way to having nobody to blame.
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U.S. Home Prices
April 16,2008
Feeling dizzy with all those changes in your house price? On this video below, an amusing rollercoaster will take you to all ups and downs of U.S. home prices since 1890. Have fun during your journey and enjoy the view from the top!

http://www.youtube.com/watch?v=kUldGc06S3U
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Picking Industries is More Important than Picking Stocks
April 14,2008
The ability to pick top-performing sectors by a mutual fund manager is a sign of this mutual fund�s better future performance, while ability to pick individual stocks is not that crucial, the study finds.

The study �Mutual Fund Industry Selection and Persistence� by Jeffrey A. Busse, an associate professor of finance at Emory University, and Qing Tong, a Ph.D. student, is not only valuable for academic circles but also interesting for ordinary investors.

The study found that out of two mutual funds with identical track records but different in whether their managers are better at picking industries or stocks within industries, the fund whose managers are much better in choosing industries although poor in choosing good stocks within them is a much better bet for future performance.

The conclusion was reached after analyzing virtually all actively managed domestic equity mutual funds from 1980 to 2006, excluding sector funds. To determine a manager�s industry-selection ability, the researchers put together a hypothetical portfolio that replaced each stock in the manager�s fund with an index for that stock�s industry. Repeating this analysis for each fund in their database, the researchers found that industry bets were responsible for about half the margin by which the average fund beat or lagged behind the market. Stock selection was responsible for the other half.

For instance, they took Eagle Growth Shares mutual fund (EGRWX), which in 2006 lagged the Standard & Poor�s 500-stock index by more than 10 percentage points. The researchers found that the industry selections of its manager actually beat the market that year. The only reason the fund was such a market laggard was that its average stock pick markedly underperformed its industry. So, according to the researchers, the fund was a good bet to beat the market the next year. And, sure enough, the fund outperformed the S&P; 500 in 2007 by 9.7 percentage points (and dropped again in 2008).



The explanation of why one kind of selection ability is a sign of better performance and the other not can be applied to individual investors as well. The researchers think it has to do with the problems that funds face when receiving large amounts of new cash. If a manager isn�t good at industry selection, he will likely invest that new cash in stocks he already owns. Usually such investment would disrupt the stock trading and lead to a diminution in the fund�s future returns.

To the opposite, fund managers with good industry-selection abilities will have plenty of other stocks within their favored industries in which to invest the new cash. As a result, according to the researchers, such managers will be more likely to continue performing well as their funds grow.

Thus, the ability to find top-performing sectors is much more important than the one to pick best performing stocks. You can analyze your own performance and see whether you need to improve some of your stock/sector picking skills.
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Share Buyback Saves Companies
April 11,2008
Volume of share repurchase by S&P; 500 index members had hit its record high last year, according to the Standard & Poor�s report. Despite first indications of overall market decline in 2007, companies spent a record amount of $589 billion on share buybacks, which is two times more than amount they spent on dividends, and for the first time ever exceeded the companies� profits of $587 billion.

Certainly, in conditions of stock markets decline, the programs of share buyback support company�s shares. On one hand, technically such programs prevent company�s shares from drop, as they decrease the number of shares outstanding and thus increase earnings per share (EPS) ratio and might even cause shares deficit, experts say. Although the statistics is against such logics: in the first quarter of 2008, the S&P; 500 index lost 10%, which was the worst year beginning for the index in the last 6 years. On the other hand, there is also an investors� factor: many investors consider the share buyback plan an indicator of company�s confidence in its financial state and future development.

Company Volume, in $ billions
Exxon Mobil Corp. 31,8
Microsoft Corp. 21,1
International Business Machines Corp. (IBM) 18,8
General Electric Co. 12,4
Hewlett-Packard Co. 11,9
The Home Depot 10,8
AT&T; Inc. 10,4
Transocean 10,3
Pfizer Inc. 10,1
Cisco Systems 10
Total 147,6

Source: Standard & Poor's The table above shows the largest share repurchase programs carried out in 2007. Volume leaders were companies in telecommunication sector, which accounted for 22.5% of all the programs. Financial sector companies cut down its participation in share buybacks from 22.3 to 13.4%, which could be explained by the sectors bad condition. At the same time, companies paid less in dividends: their total volume increased by just 10% to $246 billion, while the amount spent on the share buybacks is 36.4% higher than that of 2006, and 350% higher than share buyback volume of 2003.

Analysts forecast that if present crisis gets worse, more companies will refuse to carry out their share repurchase programs in order to support their liquidity with those funds. However, this table shows us what companies and in what sectors feel more certain than others. If companies spend corporate reserves accumulated over years on buying their own shares, this indicates they care of their own businesses and of their shareholders� money.
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Bored With Stock Trading? Trade News!
April 09,2008
If you are tired of trading securities, which is not that funny at the moment, try something new. On the Internet-based news prediction market NewsFutures.com you can bet on future news and events and earn fake money if your predictions come true.

NewsFutures.com trades shares in probable future events for fake currency called X$. Prices range anywhere between $1 to X$100 in events like �the Dow will rise on 4/2� or �the Boston Celtics will win the Eastern Conference title.� The trading price of each share represents the probability traders assign to an event. For instance, if �gas prices hit $4 per gallon before July 1� is trading at X$33, it means participants believe there is a 33% chance the gas will hit price of $4 per gallon by July 1. Below is an example of a �news stock� chart from the NewsFutures.com. Investors can also buy shares of an opposite outcome for each event.

Barack Obama will be the Democratic
Presidential Nominee in 2008


The network described above is usually referred to as �idea market.� The founder of NewsFutures.com Emile Servan-Schreiber believes his website fills a void in online media. Before NewsFutures was founded in 2000, �the media Web sites were just dumping their regular content on the Web in a non-interactive way,� he said. Now NewsFutures.com provides this interaction, allowing several thousands traders to interpret the news of today by creating the news of tomorrow on their own. Servan-Schreiber believes this is what journalism will look like in the future.

Whether it�s true or not, �idea markets� are places where people can not only try their trading skills without risking money, but also participate in picking trendy ideas or events in some sector of life or science. Also, trading news instead of stocks might be a nice means for investors to distract from volatile and risky stock market and relax for a while.
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Waiting for Social Networks� IPOs
April 07,2008
This is probably my first post about a sector which is not an investment target, but could be one if it was public. I am referring to social networks. Many Americans have accounts on the classmates.com; similar networks are now emerging in other countries of the world. MySpace, which 100,000,000th user was registered some 18 months ago, and Facebook with 70 million users are leading on the U.S. market. Bebo.com is #1social network in the UK, Ireland and New Zealand; and networks like YouTube and last.fm have millions of users from all around the world regardless of social criteria.

No wonder that such crowds of people on single resources are very attractive to advertisers. Research company eMarketer estimated the market of advertising in social networks to reach $445 million this year and grow to $3.6 billion by 2011, with the U.S. accounting for $2.5 billion. It�s worth noticing that social networks do not depend significantly on lower consumer spending � even when cutting their expenses, people spend a lot of time on the internet without spending too much money on it, and the largest bulk of profits for the networks like Facebook or YouTube come from advertising.

This all would be great news for investors, but those companies do not hurry to go public. Well, at least not in this unstable time, when their colleagues, tech companies, are quite hard up. The company United Online, which owns Classmates.com and has been public for almost 10 years, filed an application to SEC for taking Classmates Media Corp. public. However, it recalled the filing several months later for no evident reasons.

Analysts say Facebook could be a great candidate for a successful IPO, which has stable growth of sales and number of users. However, the owner of the company, 23-year old Mark Zuckerberg isn�t in a hurry to take its company public. Unlike Zuckerberg, managers and investors of another social network LinkedIN are looking very positively at the IPO perspective, although they have not filed anything in the SEC.

All we can do is waiting until social networks are turned into public companies. As long as the number of Internet users is growing and people spend lots of time on virtual communication, such companies would bring profits to both owners and shareholders.
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Agrarian Future: How Near Is It?
April 04,2008
In times of our postindustrial economic crisis, there are too few havens left were people can feel safe and comfortable in terms of their financial matters. Stocks markets became unpredictable, as companies report their losses for several subsequent quarters. Government bonds no longer seem reliable. Their low interests lag behind inflation rate, and there is actually no guarantee that the government will still be able to pay them off. Gold and oil are now a pure speculation that might collapse as well. And bank savings accounts used to be safe until the biggest banks started to act nervously.

Briefly, there is so little financial security left nowadays that homo financiens is in panic. Really, in the world were everything is measured in currency and can be calculated, it�s hard to find real value which will not be washed away with inflations and crises. But still, there is a shelter to go to.

Wall Street veteran Barton Biggs in his book Wealth, War and Wisdom recommends investors to own a farm or a rancho somewhere aside the big road but easy reachable. It turns out that farmland, which had been neglected for many years, is now a fashion trend. As agricultural products started to grow in price, so did the farmland. Biofuel production, which will definitely increase over years, also needs farmlands to grow the crops. Another factor is Asia�s growing demand � the continent will need more food for itself, so other parts of the world should start thinking of their own food production. Statistics support the above logic: according to British realtors, farmland�s price in Great Britain has increased by 25 percent over the last year. This trend will get to the U.S. eventually.

And you know what the funniest thing is? That our agrarian past might return to become our future and a solution to the postindustrial crisis.
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�Made in China� No Longer Cheap
April 02,2008
China is gradually becoming what it was titled � a strongly developing economy with fewer cheap low-quality productions and more expensive goods.

Chinese plants in the region of Guangdong in South China, widely used by manufacturers for its cheap labor and almost no regulation, are gradually closing down. A new Chinese labor law took effect on Jan.1, which raised the labor costs significantly. Also, Beijing has cancelled its tax rebates for exporters, and energy prices have also increased greatly, which added more yuans to made-in-China products.

Another difficulty for the produces is plummeting U.S. consumer market which used to absorb anything Chinese from toys to furniture and now is cutting its expenses. The stronger yuan has pushed thousands of Chinese manufacturers to the edge of bankruptcy and threatened China�s role as the preeminent exporter of low-priced goods, the Businessweek reports.

The closedown of many factories means not only fewer products and higher prices for Chinese goods. It also means a relocation of multinational companies� productions from China to more competitive countries like Vietnam and India. As analysts comment, China is no longer what it was, and globalization is here for real.



Such a shift might mean higher prices on, let�s say, shoes and textiles, which is bad for us as consumers. On the other hand, as �Made in China� might be transformed in �Made in India�, cheap products will still be available for us. As investors, we should look closer at Chinese manufacturers that produce higher-quality products which will still be in great demand in the world, or that provide services, e.g. utilities which are essential for a growing economy. For instance, Huaneng Power International Inc. (NYSE: HNP), which owns 17 thermal power plants in China, has controlling interests in 12 operating power companies and minority interests in 5 operating power companies.
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