Sunday, January 26, 2014

January investing update

Apologies for the late investing update. Things have been pretty hectic around here for the past two months, what with starting a new job in December and then the holidays.

My new job is great. I'm really enjoying the change in management. I feel like I can trust those in leadership decisions to correctly decide direction and priorities; now I can focus on execution and writing software, instead of spending time worrying that I'm building the wrong thing for the wrong reason. I can also work from home when necessary, which is a nice perk.

Here are my current totals, along with the differences from my last update in late November:
  • 401k (old) - $27,015.21 ($91)
  • 401k (new) - $651.91 ($651.91)
  • Lending Club - $2,238.16 (-$56.33)
  • Schwab - $7,316.96 ($2,169.26)
  • I-bonds - $1,603.84 ($201.92)
  • Total - $38,826.08 ($3,057.76)
Most of the gains this month were from a stock investment I made in my Schwab brokerage account. I purchased 10 shares of IBM for $181.70 per share, for a total cost of $1,825.95 after commission. While I haven't done much in the way of my own analysis of IBM, it looks like a case of a strong company with great long-term prospects getting beat up in the short term. I wanted to buy in when it was down around $174 in December, but I didn't have the cash and it quickly rebounded to the high $180s. After IBM reported their 2013Q4 earnings last week, and their stock price dipped, I decided I had to make a move. I don't know how many more opportunities I'll have to buy IBM at $180. In any case, this will be my last purchase in my taxable brokerage account for a while. The rest of my discretionary income for the next three to four months is earmarked for my final 0% credit card payoff and (for the first time ever) fully-funding a Roth IRA.

Now that I've been at my new job for two months, I've seen contributions to my new 401k plan. My company offers a full match on 4%, which is slightly better than my previous employer paying in 4% when I paid 5%. The $651.91 represents a full month's contributions, including match. I have also opened an account with Vanguard, which I'm very excited about, and I'm in the process of rolling over my old 401k into an IRA. Since my last post, I've decided against pulling any investment shenanigans, so I'll have the whole thing in Vanguard's dividend growth fund (VDIGX).

Nothing to report on my I-bond buying program. I'll continue purchasing $200 per month for the foreseeable future.

I've continued slowly winding down my Lending Club notes. This has more to do with temporary cash flow than anything else. I've also been reinvesting in soon-to-mature notes on the secondary market. Over the past two months, I had two late notes, one of which was made current, and the other is now 31-120 days late. I expect that it will be charged off.

All in all it has been a quiet two months. I'm spending much of my free time reading up on value investing. I even went so far as to purchase a book from Amazon called Valuation: Measuring and Managing the Value of Companies. It is an excellent read so far and I highly recommend it. It walks you through the theory, and more importantly the practice (with examples!), of developing your own estimates of a company's intrinsic value. Over the next few weeks I plan on analyzing a company to get my hands dirty. I think my two holdings (Corning and IBM) are a bit on the complicated side, so I'll try to find a simpler company I'm interested in for my first go-around. I expect my first discounted cash flow analysis to take a good deal of time and effort. My hope is that I'll be able to analyze a company I'm interested in every few weeks, and then over time I'll have a whole list of companies along with my estimated intrinsic value of them, and I can just wait for the price to be right. As I understand, your initial analysis takes most of the time, and afterward you can update them relatively quickly as earnings get released every quarter.

I'll leave you with the premise of the book. Companies are valuable because of the expected discounted value of their future cash flows. The only ways a company can increase in value are 1) increase Return On Invested Capital (ROIC) or 2) increase growth. ROIC is basically a measure of how effective a company's capital is. ROIC will tell you how much cash flow a company generates from investing $1 in new capital. As a corollary, the authors talk about how the value of a company cannot increase unless its ROIC increases or its growth increases. For example, substituting debt for equity in a company's capital structure, or engaging in accounting gimmickry, can not increase a company's value. Much of the book shows you how to rearrange a company's financial statements to perform discounted cash flow analysis and estimate the intrinsic value of the company. It's really fascinating stuff.