Fadi El-Eter

I was just reading an article on Bloomberg on how Venezuela decided to repatriate its gold deposited in foreign banks. Apparently, Venezuela owns 365 tons of gold, and 211 tons of this gold is deposited in foreign banks.

In any case, the article made me wonder how much is a ton of gold worth. So, I decided to make the calculations, based on the current gold price of $1,796/ounce.

So, a ton is 1,000 KG, and one KG is 35.2739619 ounces, which means that one ton is equal to 35273.9619 ounces. Now it’s easy to calculate the price of one ton of gold, which is: 35273.9619 x $1,796 = $63,352,035.57 (In case you’re wondering, Venezuela owns just over $23 billion worth of gold).

So, according to this moment’s price, a ton of gold is worth just over $63 million dollars. Of course, since gold prices fluctuate, that number will change every trading second, so all you need to do is to multiple the price of an ounce by 35,273 and you’ll get the price of a ton!

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

A curious (yet useless) question that goes through every investor’s mind at one point is “what is the average stock price on New York Stock Exchange?” Clearly, a quick search on the Internet reveals nothing, because although many people wanted to know this, nobody bothered to do the work to calculate the average price of stocks, maybe because the answer is classified as trivia that is not necessary to know for investors.

The good news is that I have decided to do the work for you! So, based on yesterday’s stock prices, the average stock price on the NYSE is $53.19. Now in case you’re wondering, the median stock price is $15.87.

How did I calculate this data? Well, I ran a script that retrieved the price of every listed stock, and then I ran both the average and the median functions on the set of prices.

I hope I satisfied your curiosity!

Note that the above numbers are valid at the time of publishing, which is August 17^th, 2011. I think it will be interesting for me to revisit this post at the end of the year to see if the average stock price increased or decreased with time.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

I was having a discussion with a friend the other day, and we were talking about stocks, and whether it can make someone rich or not. He was saying that stocks do not usually make you rich, but owning your own business will. I argued that even if you work by yourself, stocks can definitely make you rich. I know quite a few investors (working by themselves) who are at least 30% up every month. Let’s examine this statement for a moment; let’s start with $10,000 beginning of September and see how much that $10,000 will be in just two years from now if we make 30% every month:

So, in only 2 years, these traders can increase the initial size of their investments over 400 times from $10,000 to over $4 million. Not too bad, huh?

Now these people making 30%+ every month are excellent traders, let’s say that you are a conservative, careful, and somehow inexperienced trader, making only 5% every month, let’s see how much you’ll be making in 2 years:

So, you have tripled your initial investment in only 2 years, but that didn’t make you rich, did it? Because now you have only $20,000 extra, and you haven’t paid your taxes yet. However, even with this mediocre percentage increase every month (I’m not saying it’s easy, I’m just saying it’s mediocre), you can make your first million in 8 years, and we haven’t taken into consideration that during these 8 years, you are sure to become a much more experienced trader, that will most certainly make more than just 5% every month.

In any case, I am certain that stocks can make anyone rich, but it is not necessarily the case for all people. Here’s what it takes for stocks to make you rich:

– You should invest money that you don’t need in the first place.
– You should not be greedy, and you should not be afraid. Think about it this way, if stocks will always go up then there will be no buying opportunities and everyone will leave his job to trade stocks.
– You should be patient. Selling when your stocks are down and buying when a stock is on fire are not the best strategies. Keep in mind that what goes up must go down and vice versa.
– You should do the necessary due diligence before buying any stock (e.g. studying the trend of the stocks)
– You should believe in yourself and trust your instincts.
– You should focus on commodities (especially oil – buying when it’s down, selling when it’s up) instead of focusing on companies.

There are many people who became rich by trading stocks, and many many many people who left the stock market within a year after they just “gave up”. Which one of them do you intend to be?

I know that bank stocks nowadays are very scary, but, on the other hand, I think that they’re undervalued on the long run.

A bank stock that I think is a good stock is UBS, and here’s why:

– UBS is the largest bank in Switzerland (the second largest in Switzerland is Credit Suisse). Switzerland is a country that, despite all the financial and political turmoil in the world, remained strong, and the Swiss Franc is one of the most attractive currencies nowadays (along with the Canadian Dollar and the Japanese Yen).

– In most cases, the movement of the UBS stock is determined by the movement of the financials in the stock market, and not by some company news.

– The stock is trading at a P/E of only 7.23, meaning that even in today’s harsh times, it will take UBS just over 7 years to pay back all the investors.

– UBS (the bank) is actually making money, and is not faced by a myriad of scandals, new regulations, and bad news every other day.

– At the current price of $14.72, the stock is trading 9% below its book value of $16.13. OK, I know that BAC is trading at less than 60% of its book value, but Bank of America has a lot of problems, and is a stock that most investors hate/dread.

I do not only think that UBS is a good stock, I think it’s an excellent stock, and I think it’s way undervalued. In these very bad times for financials, its price should be at least 10 P/E, which is $20. In normal times it should trade at 20 P/E (or $40).

Even if you’re thinking short term, I think you should consider buying UBS, for this stock is probably the best of bank stocks at the current times.

When I first started this website, I had one aim, I wanted to create articles about stocks that anyone can understand. I wanted to simplify all the concepts of stocks and stock trading to people who have never traded stocks. Stock trading is exciting, fun, and lucrative (but can be very stressful), and is not gambling, and my aim is to always pass this message to my readers.

Now many people who have never ever made a trade (in the stock market) in their lives ask a question that might seem very obvious to us, “how can stocks make you money?”.

Well, there are four ways that stocks can make you money:

– Dividends: Some companies offer dividends to their stockholders (people who own shares from their companies). Dividends typically (but not always) reflect the performance of the company, and some of the best performing companies offer 4% to 5% a year in dividends, which is better than the interest rate on a fixed term savings account in the bank (I think these days banks give you something less than 1% on your money). An example of a stock giving you 4% a year is RY (Royal Bank of Canada), RY gives 50 cents every quarter, and the stock is around $50 (so you get 1% of your investment every 3 months, which you can re-invest to buy even more RY!). You have to be careful from companies offering very high dividends, which may be a sign of an underperforming stock. Note that there are some great stocks, such as AAPL (well, it’s great at least for now) that do not offer dividends.

– Stocks going up in price and you selling at the right time to make a profit: Good stocks generally go up on the long term. Some have spikes in very short periods (for example, 20% or 30% increase in a few days), and some go up 5% in the whole year. Now when your stock is up, you can sell your shares in the market and make a profit, but this will forfeit your future dividends, because you will no longer be a stockholder of the company. This is a two edged sword though, as stocks can also go down. Take a look at BAC, the stock of Bank of America, which is one of the biggest banks in the US, the stock went down 46% so far this year. If you want to make money by selling stocks you have to 1) buy stocks in the right industry that is not facing long term troubles and 2) choose the right timing and 3) keep a close eye on your stocks and 4) be patient and 5) never ever be greedy!

– Options: Options are advanced tools to make money from stock trading. The main power of options is leverage. An option gives you the right to buy/sell stocks at a certain price before a certain date (but note that you’re not obliged to buy/sell the stock). I will discuss options in details in another article (this topic is advanced, and as new investor, I think you should worry first about trading equities).

– Shorting stocks: An introduction to shorting stocks is available here. Generally, the basic idea of shorting is borrowing shares of a certain stock from your broker, sell them in the market immediately, wait for the stock to go down in price, buy the shares again, and then return to them to your broker. Your profit will be the difference between the price when you first sold the stock and that when you bought it. So, shorting stocks means that you will make money when a stock goes down, instead of making money when a stock goes up. Not all stocks can be shorted, and your broker usually demands that you have something called a margin account in order to short stocks. Shorting stocks is controversial, and similarly to options, is also used by advanced investors.

More than a decade ago, I took a business class, which was called BAD 201 (yes, it was that bad), and in that class the instructor made a statement that I was not able to forget: “The most liquid thing on earth is money and the most liquid money is the USD”. Yes, it’s the USD you have in your pocket to buy food, the USD you have in your bank account to buy a house, the USD you get by exchanging some of your local currency into the mighty dollars. Money is more liquid than gold (that’s why the USD is here to stay), and definitely more liquid than stocks.

I guess by now you understand that liquidity is not, as programmers say, a boolean, it’s not that something is either liquid or non-liquid, liquidity is a factor, something can be less liquid or more liquid than something else, but nothing (at least at the international level) is more liquid than money, and in particular the USD. Liquidity is simply how easy you can exchange the thing that you have for other things (yes, in essence we are all still doing bartering).

Now that we’ve established that liquidity is a factor, we can say that stocks are liquid, but how liquid are they? Well, that depends on the stock. For example, BAC and C stocks are extremely liquid, the second you want to sell these stocks at market price you will find not just one, but many buyers, and that’s why buy and sell transactions of such stocks are instantaneous. Other stocks, such as BIOS for example, are less liquid, sometimes it takes like 20 minutes to find a buyer, but you will still find a buyer. So it’s not like they’re not liquid, but they are certainly less liquid than BAC or C. Generally, stocks that have a high volume (more than 1 million shares/trading day) are very liquid, other than that you may experience some delays selling your shares.

Now there’s another problem with undermines the liquidity of stocks, is that you can’t sell them on holidays, on weekends, or after hours. Another thing is that you have to wait after selling a few days for the money to be transferred to your account. Compared to money, this is hardly liquid, but compared to other transactions, such as selling a real estate which may take several months, it is very liquid.

I am watching closely nearly all US bank stocks, and here are some facts from my observations:

• Most of their respective companies are (officially) making money (with the exception of Bank of America).
• Nearly all of them have a very low P/E hovering around 10 (with the exception of BAC that is losing money, and Morgan Stanley that has a P/E of around 28), which means it will take most of these bank institutions a maximum of 10 years with the current bad earnings to buy back all their shares.
• Most of them used to pay high dividends, and will probably be able to pay high dividends in the future (I think by 2012 all banks will raise their dividends, which will make their stocks very attractive).
• All of them are affected by the never-ending effects of the financial crisis.
• All of the remaining big banks are here to stay. Well, nothing is for certain, but I don’t see Citigroup or Bank of America vanishing anytime soon, at least in the next 30 years. After all, they’ve stood still during the most terrible days of the financial crisis and they eventually made it (OK, they needed some government money, but still, they did make it).
• (following is a personal opinion) All the talks about a double dip are just sophisticated ways to play the markets and rob small investors (who will flee the stock market) from their hard earned cash. I do think, however, that there will be some corrections in developing nations, such as India and China when it comes to real estate prices (which will negatively affect the whole cycle).
• Whatever happened or will happen in Europe is already “priced in” for the US banks stocks that have European exposure.

I think you can easily notice that I do believe that bank stocks are undervalued, in fact, they are very undervalued, even when it comes to BAC. But when will they recover? I don’t think this year, and not even next year, there’s just too much going on at the moment for all of them, at the national and the international level. I do think that 2013 will be a totally different story for US banks, as the Euro will start fading by then, and European banks will become less trustworthy, at least for international investors.

Are bank stocks a good investment at the moment? They are, if you want to go long term (I think, for example, C and BAC will go up 3 folds by 2013), but if you’re a short term trader, then stay away, until a bottom is established.

I had a small discussion with my grandfather the other day. He noticed that I don’t seem to work in a company, and yet I have money. So one day he asked me “What do you do in life to make money?”. I have answered, “Several things”. “Like what?”, he asked. “I trade stocks and I have some online ventures”, I answered. He then asked another “Stock trading? Tell me one thing, can your stocks go negative?” I first didn’t understand the question, I thought that he wanted to know if my stocks go down in value (which is very normal), but what he really meant was if a stock can trade with a negative value, for example, BAC trading at $-2 (which, by the way, may happen soon if the stock keeps on losing a dollar or two every week. OK, it can’t happen, but you get the point).

In any case, I told my grandfather that no, there’s no way on heaven or on earth that a stock can trade with a negative value. You can’t lose money more than your original investment, except in the case when you are shorting stocks (which is something that many investors don’t know how to do/refuse to do). I then told the following scenario to my grandfather:

– Let’s say you have $10,000, and there is a stock that you want to buy which is trading at $10.
– With your $10,000 you buy 1,000 shares of that stock.
– If the stock drops to $5, then you will lose $5,000 of your investment.
– If the company goes bankrupt, then you will lose all your investment (your $10,000 will be lost, all of them), but there is no way that you will lose more than $10,000, because the absolute minimum that a stock will drop to is $0 (or maybe 1 cent – I’m not sure).

After explaining the above to my grandfather, I then started pondering the thought that he had, and I realized it’s one of the main reasons that people mistakenly think that stock trading is equivalent to gambling. It’s a shame. I think stock trading is the best, the funnest, and a very ethical way to make money.

One of the topics I really hate talking about is gold, but I can’t ignore it anymore since the metal is now trading around $1,800. This is becoming insane. Investors are saying that gold is the only real “money” right now with a real intrinsic value, and all the other money in the world is now heading into oblivion.

But the question is, who determines that gold is worth something or not? Who determines that gold has an intrinsic value? Isn’t us, the humans, who, coincidentally are the same humans who think that the US Dollar has an intrinsic value? What is the use of gold, other than buying jewelry for a girl who may or may not like what you will get her, and who will certainly prefer anything diamond instead of gold. Can we use gold as a currency like the “good (very) old times”, when people used to use gold coins to do trades and buy real estate? Of course we can, but do we have to? People in ancient history used to use gold as a currency as it was impossible to counterfeit, but now times have changed, governments are able to print money that is nearly impossible to counterfeit, so what’s the point?

I think I will now end my rant about gold and move to the subject of this post, “how can the dollar survive?” This question, that is asked by many investors out there, imply that the dollar is struggling. Let me state some facts that will counter this argument:

• The Euro, which is the second most important currency in the world and the main competitor to the USD, is really struggling, casting some doubts on whether the Euro will still exist in a few years from now (I think that by 2013 the Euro will vanish, or at least will not be as strong as today).

• The USD is the still by far the most important currency in the world. All major trades (such as those related to oil) are done in the USD. I think the most ironic thing is that gold is priced in USD, and not the other way around (You know what an ounce of gold is worth in USD, but when was the last time you wanted to know how much is $1 worth in gold).

• Gold is not enough to be used as an international currency. Every day, there are trillions of dollars in transactions (from a guy buying a small apple in a store to another one buying a mansion in Hollywood). There is just not enough gold to cover these transactions.

• The Swiss Franc and the Japanese Yen are not as immune and as strong as everyone seems to think. Investors are running to these 2 currencies en mass today, which is pointless, because whether you like it or not, these currencies are strongly tied to the USD and the US economy. Imagine the Japanese economy without American customers buying their products. Imagine the Swiss economy without American clients depositing money in its banks.

• China is not ready, nor it is willing to, to take America’s role leading the world’s economy. Some investors who think long term believe that the Chinese Yuan will replace the USD as an international currency. I think this will never happen, not in 10 years, not in 20 years, and not in 50 years. Here’s why:

  • Investors need transparency. China has no transparency whatsoever.
  • Investors need a government that respects the rights of companies (think copyright laws in China versus those in the US).
  • China has a lot of problems that are very rarely exposed to the public.

Gold is a major bubble, and a very dangerous game. Gold has no value expect what we investors think it is worth. The USD is here to stay, and does not need to survive. I’m not sure though if gold will survive as a long term hedge for nervous investors.

Here’s a list that I think is suitable for these bad times: a list of the top 100 stocks that are currently trading above the 200 DMA (Day Moving Average). These stocks are interesting (especially after Monday’s bloodbath), because they are doing well when compared to their own performance when most other stocks are doing really, really bad.

Below is the list. Note that the data below is valid for August 10^th, 2011. I have ordered the list by the percentage at which the stock is higher than its 200 DMA. I hope you guys will find it useful!

Of course almost all of the stocks above are unknown to most investors (maybe I should have only included high volume stocks?). But on the other hand, this where smart investors make some serious money, by trading these small (yet very risky) stocks. And no, in case you’re wondering, True Religion Apparel does not make money by producing clothes for monks (I have checked their website).