Investors lose money not because the stock market is bad and not because they’re unlucky (or jinxed, or born under the wrong start), they will lose money when their emotions are either controlled by fear and/or greed.

Let’s start with fear…

Fear in the stock market usually happens when you’re playing with money that not yours or money that you cannot afford to lose. Once an investor is controlled by fear, he loses sight of the basic fundamental of the stock market (it goes up and down, and, on the very long term, it goes up), and starts panicking when he starts losing money on his stocks, until he reaches a point where he lost so much that he decides to sell his stock and probably get out of the market completely. There are thousands of new people who enter the stock market every day, and thousands who get out every day, because they were destroyed by fear. The first lesson that any investor has to learn is to accept loss as part of the game, and maintain high spirits even if his stocks are losing. Fear can be completely avoided by doing the following:

- Trading with money that you can afford to lose (often called risk money)
- Studying the fundamentals (including the technicals) of the stock and the company before buying it
- Buying married puts
- And again, accepting loss as part of the game, and moving forward if you lose money on a stock (think about it this way, if it was guaranteed that people will make money on every stock, then everybody would be trading stocks and nobody will be doing some real, productive work)

I personally did lose money whenever I traded with money that I was afraid to lose. I often panicked, and I sold at a loss.

Greed is another evil vice in the stock trading world. I cannot think of any stock I bought and sold at a loss where I did not make money at one point, and where I thought, hey, let me wait a bit, maybe that stock can go up another 5%, and I will make even more money. Of course, in most cases, the stock gave away its winnings, and lost 5%.

Greed is part of any human’s nature: everyone wants more (and the best) of everything, everyone thinks that if he just waits a bit, maybe he can get a better deal, and while ignoring the good deal that he already had and waiting for the better deal, the person comes to realize that the good deal was actually the best deal, and this is where futile remorse takes place (“I should have sold when I had the chance”).

Here’s how to avoid greed:

- Make a reasonable expectation from the stock (for example, I will be happy with a 2% profit)
- Create a sell on stop condition on your winning stocks if you intend to be a bit greedy. In other words, let your winnings run. As the stock goes up, increase your sell on stop. Get out of the stock when you think that you already made a lot of money.
- Don’t feel regret by selling stocks for a small profit. Remember that there was always a possibility for you to lose money on these stocks.
- Diversify your portfolio.

An investor with no fear and greed will rarely, if ever, lose money on a trade.

I was talking to a fellow stock trader a couple of days ago, and we were discussing stocks, and how fast you can make money if you don’t have these two stock trading sins: fear and greed (I will discuss them another time). Anyway, during the conversation, he said something that made me think, he said that when you make money on the stock market, you just take money from one or more investors who just lost money on the same stock, effectively saying that the stock market is a zero same game. A zero sum game means that when someone loses an amount of money, another makes that same amount of money. A real world example of a zero sum game is the forex market. Anytime you make money on the forex market someone loses money, and vice versa, that’s why I feel that the forex market is more like gambling.

However, can we really consider that the stock market is a zero sum game? Let’s say you buy 1,000 stocks of RIG at the current price of $71.62. This means that you have to pay $71,620 for these stocks (excluding commission fees, of course). Now if the stock goes up to $80 in a week, then you will net $8,380. But where is that money coming from? Is it coming from an investor who bought the stock at $78, that doesn’t make sense. Both of you are making money when the stock goes up. A more logical explanation would be to think about those shorting the stock, but what is the percentage of those buying short versus those who are long on the stock. In the case of RIG, it is 1.4%, not enough at all to make up the winnings of the remaining 98.6%. So where is the money coming from? The money is coming from the increased value of the company because of its great earnings, its sunny forecasts for the next quarter, of just because of investor’s speculation. A stock can be viewed as a commodity which price is directly tied to the performance of its company, and, the more performing the company is, the more demand there is on that stock, and the higher the stock will go. So you’re really not “stealing” money from a fellow investor when you make money on a stock, you’re just rewarded because you believed in the company and you invested money in it, and now that investment is generating money. Also, when you lose money on the stock, it doesn’t mean that someone, somewhere, will take your money because he bet against the stock. In most case, when you lose money on a stock, the money vanishes in thin air.

Bottom line is, the stock market is not a zero sum game, which means that us, stock traders, are not making money by sucking the blood of each other.

One of the funniest lines about Canadian Elections was from a Canadian standup comedian: “What? Elections? Now? Well at least let put my pants on.” This line fully describes Canadian elections, they just throw it at you. It’s not like every X number of years as in some countries (or never as in some other countries), Canadian elections happen when the opposition topples the government (when it’s a minority government).

Anyway, in this election, there are 3 major players:

- The conservatives: Who are trying to win a majority government (half the MPs + 1 ).
- The liberals: Who are trying to form a government, any government!
- The NDP: Who are slowly but surely building up popularity and gaining seats by telling the people that they represent the real change.

For the last couple of elections, I have been watching the NDP, as it was growing from strength to strength! Why not? Canadians genuinely believe that the NDP represents the real change, that they will give them better health-care (which is currently a mess), more jobs. They are also promising lower taxation from small businesses and more control over large corporations. That’s exactly what over 90% of the Canadians want.

As for the conservatives, I think they did well leading the country through the financial meltdown in 2008-2009, they also did very well when it comes to simplifying the immigration procedures. What I think they did wrong was the following:

- The dispute with the United Arab Emirates: In case you don’t know about this, Canada had a very large dispute in late 2010 with the United Arab Emirates. The dispute started when the UAE wanted to land more Emirates flights on Canadian soil. The conservatives refused, stating that Air Canada’s interests in the far east routes will be disputed. The UAE retaliated by closing a military base (called Camp Mirage) in Dubai. The UAE waited for a Canadian response, but there was none. The UAE then retaliated by forcing strict visa requirements on Canadians visiting or working in the UAE. The government still did not back down. I think that the Canadian goverment made a big mistake by denying more flights to Emirates: If Air Canada cannot compete with international airlines, then it’s Air Canada’s problem, not Canada‘s problem. The Canadian government should have allowed Emirates to operate the additional flights. There are 20,000 Canadians in the UAE, that’s 0.067% of the whole Canadian population! I think, in the eyes of the Canadian government, these people should take priority over Air Canada’s corporate interests.

- The Americanization of Canada: Canada is not an American state, period! Canada has its own (much more peaceful) culture, and is very ethnically diverse. Canada says, bring your differences, live with us, let us learn from you, learn from us, and become one of us. The US says, leave your differences where you’re from, and then be one of us.

- The wars: I’m paying taxes, and I don’t want my taxes to be spent buying or building arms to fight countries or regimes that have never (or will never) threatened us directly. If a country has an internal problem, then I’m sure the people of that country, if they really want to get it solved, will get it solved. True democracy cannot be forced, it cannot be exported! True democracy can only be made from within.

Now let me focus on what the conservatives did right since their election:

- Stable economy: Canada was, as far as I know (and from what I’ve read), the only G8 country that navigated through the financial crisis of 2008-2009 with the least possible injuries. Canada, compared to the US, had a much more stable economy. People from the US started to immigrate to Canada during that period, which says a lot!

- Lower taxes: If I’m going to vote for the conservatives (I’m saying only “if”), then it’s because I’m sure they will never ever raise taxes. In fact, the conservatives have lowered taxes considerably since they went to power, and they have created many tax incentives so far. Some say that they had a surplus of money from the liberals era, maybe this is right, but I’m almost sure that if the liberals were in power, they would have raised the taxes.

- Faster immigration process: Because of the previous bureaucracy (back from the liberals era), the immigration process to Canada was taking (back in 2009) up to 6 years. Imagine, you apply to immigrate to Canada when you are 24, and you get to go to Canada when you’re 30. In these 6 years you would have made substantial changes to your life (they are probably the most important years in anyone’s life). Would you now give up all this and go to Canada, and start from scratch all over again? I think the previous system was unfair. Under the new system, immigration applications are now processed in one year or less (I’ve heard of cases processed in a couple of months), which makes all the difference, and will get quality applicants who are eager (and more importantly, not hesitant) to come to Canada.

- Transparency: I have to say that, compared to previous liberal governments, Harper governments were very transparent (probably because they were always under scrutiny from the media). There was a scandal or two, but nothing really major.

Now let’s move to the liberals, I think the liberals currently have some serious issues that they need to address before they even think about forming a government:

- Weak leadership: Stephane Dione beat Michael Ignatieff a few years ago, but apparently he was not a leader (I know, this is on the conservatives’ website, but it reflects the opinion of many Canadians, including the liberals). If Dione did beat Ignatieff, what does that tell us about Ignatieff’s leadership? I saw the debate a couple of weeks ago on TV, and I have to say, the between Jack Layton, Stephen Harper, and Michael Ignatieff, I felt that the latter was the weakest of all 3. All his arguments were based on attacks on the Harper, and all of what he’s saying was assumptions (like when he said that the Canadian people don’t trust Harper).

- Questionable alliances: The liberals allied themselves with the Bloc Quebecois, a party with a main objective of seceding from Canada (while we know that they can’t and won’t do this, equalization payments, anyone?). Shall I say more?

- Higher Taxes: Although Ignatieff said that he will not raise taxes, he said it in a way that raises a bit of skepticism: He said it while responding to Harper, who said that the liberals will raise taxes. I think this is a bit scary, because every Canadian relates liberals to higher taxes, so probably the first thing on the liberals’ agenda should have been “We will not raise taxes”. I think they will lose a lot of votes because they failed to do so.

- Quebec is sick with the liberals: The liberal party in Quebec has been in power for ages now. Just look at the roads (I took this picture yesterday while jogging, sorry but I’m not a professional photographer, but you see my point)!

A random road near downtown Montreal

…and please don’t tell me that this is because of the snow, it snows everywhere else in Canada, yet this is the only place where roads are that pathetic (once you cross the Quebec border the roads are completely different). The infrastructure generally sucks in Quebec, and, the liberals, just to balance their budgets, have increased the PST (provincial taxes) by 1%, and this will go on until the year 2013. An excellent way to drive away investors and entrepreneurs!

On the bright side, the liberals will most probably address all the problems that the conservatives created including the Canadian-UAE dispute because of Air Canada. I think resolving this dispute is critical to Canada’s interests in the Middle East (everyone is trying to gain more friends there, including the US, why are we creating enemies?)

I personally think that the biggest winner will be the NDP, and, it’ll be either the conservatives with another minority government (which will deal a serious blow to the liberals), or a liberals party controlled by the NDP. We shall see.

Now how does this relate to the Canadian Stock Market? Here’s how I see it:

- Conservatives win (majority): The market will go up.
- Conservatives win (minority): No change.
- Liberals win (minority): Minimal change, on the down side.
- Liberals win (majority): Will never happen, not under this leadership.
- NDP win (minority): Will never happen, but if we want to just entertain the idea, the markets will go down.
- NDP win (majority): Will never happen.
- Block Quebecois win (minority): Will never ever happen.
- Block Quebecois win (majority): Will never ever ever happen, but if it will ever happen, the Canada that we know will cease to exist!

April 21, 2011 | In: Technology

Google, Panda, and GOOG

On April 11th, Google rolled out Panda at the international level. Panda is an algorithm that is supposed to penalize website with not so great content (read duplicate content), and reward websites with good quality content (read original content). Websites penalized under this algorithm have lost, in some cases, over 90% of their traffic.

Most of the websites penalized were content farms, which means that they contain articles with lots of keywords just to attract traffic. Many of these content farms host so called “derived” articles. Derived articles are those articles that are copies of other articles on the websites, with minor alterations to fool search engines. Google took a very bold step and penalized heavy weight websites such as EzineArticles (I have to say that back in 2007 I had a few articles published on this mostly spammy website. The articles still exist.), WiseGeek, HubPages, as well as many, many other websites. What’s weird is that most of these websites are monetized using Google Adsense, which makes Google look as if it stabbed itself in the neck. But did it really do this?

To answer this question, let us analyze, in one sentence, the Internet traffic:

Internet Traffic is mostly a zero sum game, if a website loses traffic, then another one will gain.

So the question is, who gained that lost traffic?

Take a look at Answers.com traffic, which gained 13% in March alone (a week after Google started rolling out the Panda algorithm):

Answers.com traffic for the last year

Let’s also take a look at another website, EHow.com, which gained 20% in March :

EHow.com traffic for the last year

Now let’s take a look at EzineArticles.com, which lost around 35% of traffic in March:

EzineArticles.com traffic for the last year

EzineArticles is by far the largest website that was hit by the algorithm change, and is 1/4 of the size of Answers.com. Obviously, Google has shifted the traffic from one MFA (Made For Adsense) website to another MFA website, a much bigger one though. Just for the records, Answers.com, with the exception of its wiki.answers.com subdomain, doesn’t have any original content (it’s all copied from Wikipedia).

At first glance, the initiated might think that Google did the right thing at the expense of its revenue, while in fact they did something while making sure that their revenue will remain the same or will go up. They didn’t shift the traffic to authority websites with no Adsense on them, they shifted the traffic to websites filled with Adsense. In fact, I bet the CTR on Answers.com is much higher than that of EzineArticles.com. After all, the former website looks much more professional and much less spammy.

Bottom line is, GOOG will not be affected at all with this algorithm change. But Google, in general, has other problems. Let’ see!

Oh, and by the way, Answers.com is listed in the NASDAQ, symbol ANSW (you know what you need to do right? But pay attention to that very high P/E, and remember, Answers.com is also at the mercy of the ever powerful Google).

Update: It seems that Answers.com was bought by AFCV Holdings a week ago. So forget about buying its stocks, it is no longer traded publicly.

We all have witnessed how oil prices jumped dramatically in the past few months. We also know that Libya’s instability should have had little effect on current oil prices, but we also know why oil prices spiked: Speculation.

Speculation is a very common word when you’re trading stocks: even if a company issued some terrible news, but there is speculation that the company will be bought, the stock will go up. Of course, this works the same way the other way around: if a company announced a great quarter, but investors are speculating that next quarter, the company will not be able to meet the expectations, then its stock will drop at least 5%. That’s how it goes.

Speculation in oil is a harmful game: harmful to the economy, and harmful to the real people, the people that are leading real jobs and having real families and working fair and square. Speculation in oil nearly always is bullish (everyone thinks that there is not enough oil supply to meet all the demands, which is complete false). OPEC consistently tries to reduce speculation in the market, but consistently fails to do so. In fact, when OPEC announces it’s going to increase its output, speculators think that there was not enough oil in the first place so they buy even more.

So how can the price of oil be controlled? It is very simple, suspend oil trading in stock markets. A huge chunk of the price of an oil barrel at the moment is pure speculation, and this needn’t be the case. It’s hurting everyone (well, nearly everyone), and everything (including the economical recovery). Imagine if traders are no longer allowed to trade oil ETFs. There will be no speculation in oil prices whatsoever, the price of oil will only be determined by supply and demand.

Is this feasible, I’m sure it is. Are regulators ready to do this bold step? I’m sure they’re not, and probably neither is the whole world!

That was just a thought!

April 19, 2011 | In: Energy

Is BP Undervalued?

I have analyzed the price of BP a while ago, and I concluded that a fair price for this stock is around $44, when crude (NYMEX) is around $80 (BP’s stock is directly related to crude price). But now crude is trading at $107, and BP is trading at $44.76. I think it’s very clear that BP, at this price, is well below its real value. So what is its real (and fair) value?

Well, by applying a simple mathematical formula we get the real price = (44 x 107)/80 = $58.85. Obviously, the stock is way undervalued, trading more than $14 below its real value. I think there is no better time to buy this stock, even if crude drops to around $90. In fact, if crude does drop to $90 (which is highly unlikely because of the huge inflation we are facing), then a fair price of this stock would be: $49.50. Still $5 above its current value.

What are you waiting for? Buy BP!

One of the worst bank stocks (of course with the exception of AIB and IRE) is BAC (Bank of America Corporation). This stock is in a downtrend since April of 2010, and everytime the stock breaks the $15 level, it goes down a few dollars. The stock reached a very low of $10.91 back in November (I used to own a lot of this damned stock by then, but still I made money as I waited until the end of the year to sell my shares).

The stock had a nice January Effect, but it just couldn’t sustain the momentum.

I still see that BAC is a good buy, but not on the short term, and not even on the medium term, they’re all very bearish. Bank of America is simply too big to fail, even with all its current problems. For now just stay away from this stock, stick to something better, more stable. An excellent stock to buy at the moment is C, the stock is a bargain at $4.44. I think it’s easy to see this stock trading over $6 by the end of the year (before taking the reverse split into consideration). C is trading at a P/E of 12.54, what better deal do you want?

Another stock that I really like and I think has a huge potential is MS (Morgan Stanley), the stock is trading at a P/E of 11.47 at $26.43 at the current moment. It broke the $30 barrier back in February, and I think it can do it again.

For those who don’t know, the “January Effect” is a phenonmenon where most stocks surge in the month of January. The January Effect completely fades by the end of January, where investors start looking at the real fundamentals of the stock for trading.

So why do we have the January Effect?

The reason is that in December, most (small) investors start selling their stocks (especially small cap stocks) in order to claim capital losses on their taxes. Investors (sometimes the same investors) start buying the same stocks that they sold again in January, causing more demand and thus upping the price of the stock.

I thought before that the January Effect was a myth, but I can’t think of any stock that I traded at one point or the other (non-ETF) that didn’t go up in January, and this applies across the board (small cap and large cap stocks).

Let’s take a look at some examples…

Bank of America (NYSE:BAC)

Bank of America January Effect

Take a look at the chart above, the stock has jumped 85 cents in one day, up 6.3%. By mid January, the stock was up 14% before starting to retreat.

Masco Corporation (NYSE:MAS)

Masco Corporation January Effect

Masco Corporation, the home improvement and building giant, went up 39 cents on January first, or 3%. What’s more interesting is that the stock jumped to $14 on mid January, or up $1.34 (10% from the beginning of the year).

Nvidia Corporation (NYSE:NVDA)

Nvidia Corporation January Effect

Nvidia jumped more than $4 in just 4 days from the beginning of the year, and closed the month $8.5 higher, or 55% higher!

Think of any stock, that is not an ETF stock, and that didn’t have substantially bad news on January first, and you will see that the January Effect is real, and there’s a potential of making real money from this phenomenon. Here’s a guaranteed tip an investor could use once a year!

Other stocks I can think of at the moment: C, CSCO, AAPL, GOOG. The list is endless!

Note: All images are courtesy of Google finance.

As you may already know, there is a lot of political instability all over the MENA region, this time in Libya, the country with the largest oil reserves in Africa. As an investor who’s (probably like anyone else) currently trading oil, I was very interested to know how much oil should jump should all Libya stops exporting oil for one reason or the other. Because of this, I made a little research to estimate what is a realistic price for oil (NYMEX) should this occur.

Prior to this crisis, NYMEX Oil delivery for March closed at $89.71 last Friday, after being already affected by the instability in Egypt, and then in Bahrain (not to mention other tensions in the Middle East). A week earlier it was in the mid 80s. At this very moment, it is currently being traded at around $94.70, up $5 from Friday (yesterday was a holiday). Let’s assess Libya from an oil production perspective.

Libya produces 1.1 million barrels a day, compared to a world production of around 70 million barrels. This means that the Libyan contribution to the world oil is 1.1/70 = 1.5%, which means, as a worst case scenario, the world will experience a demand of another 1.5%, which means that the oil price should go up only 1.5% (By the way, I’m sure that OPEC will easily cover for this 1.5%), so this makes the realistic oil price, taking into consideration the global instability (in particular in the Middle East), around $91.35. The rest is pure speculation.

But then again, as many investors say (including me), buy the rumor, sell the news. But you know what, I’m selling nearly all my HOUs and I’m buying some HODs by the end of the day today. The former is way overvalued, and the latter is way undervalued.

Tomorrow will be more fun…

I have previously written about DGIT, when it was way undervalued, and trading at around $15.

Fast forward 4 months to today, and the stock is now trading at $28, that’s around 90% gain if you bought the stock back in September.

Take a look at the six month chart of the stock:

DGIT 6 month chart (courtesy of Google Finance)

Now let’s examine the chart to see if the stock still has room to grow. The stock has reached an all time high of $42 back in June of 2010, which means that it is probably heading this way, and at least for the next couple of months, the stock will preserve its bullish trend.

However, if in the next guidance, DG FastChannel Inc. says that the churn rate is increasing, or they’re having trouble acquiring new customers, or the cost of acquiring new customers has increased, or the competition is becoming fiercer, then expect the stock to lose at least half of its price in a month’s time. The problem with this industry is that it’s very volatile, lucrative, but volatile. Customers are demanding (and often cheap) and competition is also merciless.

Now if you’re a very optimistic investor, then take a look at the market capitalization of DG FastChannel, it is currently at $770 million, that’s cheap, if a company wants to buy it. Now who’s going to buy it, which large company has a business that will benefit from buying DG FastChannel. There are 3 that I can think of, at the top of my head:

Netflix (NFLX): Netflix could hugely benefit from this deal, as it will grow its streaming empire. Netflix has a market capitalization of $9.54 billion (currently the stock is trading at $182.70).

Google (GOOG): With a market capitalization of almost $200 billion, Google can swallow DG FastChannel much easier than Netflix, without a single hiccup. Not only Google can afford this company, it needs this company. Why? They have Google TV!

Apple (AAPL): Buying this company is even cheaper for Apple (Apple has a market capitalization of $316 billion). Apple also will benefit from this deal, as it has the Apple TV.

Google and Apple are sitting both on mountains of cash money to afford this deal. For Netflix, it’s a different story. The company will probably not sell for less than $2 billion, which is over 20% of Netflix market capitalization (at its current inflated P/E 68). If Netflix buys DGIT, then it’ll be the end of it. Google and Apple are the best (and realistic) potential buyers.

Note that Microsoft may also be interested, and Sony as well (however, Sony is now heavily marketing Netflix, and has an alliance with Google when it comes to TV streaming).

It’ll be interesting to see what will happen to DG FastChannel by the end of this year…