Simplest Buy and Hold Portfolio

So you have some discretionary money that you can risk, don't need the money within five years, and want some growth. But you may not know too much about individual stocks and you don't have the time nor the inclination to follow individual stocks.

Here's a very simple and easy Buy and Hold Portfolio that you don't have to monitor often, and offers good performance and diversification. (Do know that while the stock market averages 10% per year over a long time, that during any individual year, you could lose or gain 40%?)

The strategy is based on buying and holding certain ETFs, or Exchange Traded Funds. An Exchange Traded Fund is essentially a mutual fund (mostly indexed to a particular index. The ETF company just mirrors the index, and doesn't make active stock decisions) that trades on the major exchanges just like a regular stock. You normally buy and sell them and pay commissions. For example, the stock symbol "DIA", isn't really an individual company. The "DIA" ETF represents the Dow Jones Industrial Average ETF. It holds the 30 stocks in the Dow Jones Industrial Average. However, from your point of view, you are buying and selling "DIA" directly, a single trading instrument. You lose money and profit just as if you were holding a single stock.

The Portfolio

Here's the recommended simple buy and hold portfolio that you do not have to monitor that often:

• SPY -- The S&P 500 ETF representing 500 of the US biggest and most influential companies.
  
• MDY -- The Midcap US ETF representing the middle size US companies.
  
• IWM -- The Small Cap US ETF representing some of the smaller companies in the US
  
• EFA -- The iShares Developed International Market ETF representing investments in Europe, Japan and Australia
  
• EEM -- The iShares International Emerging Market ETF which covers international emerging markets such as Taiwan, Korea, China, Mexico, Brazil, Russia and India.
  

That's it! You are diversified throughout the US and the world. You can monitor your portfolio once a year, or twice a year.

If you don't have that much money, you can start with one or two ETFs first. I suggest SPY and EFA as your first two ETFs. The third ETF should be IWM. The fourth should be EEM, and the last MDY.

If you wish to learn more, or even start learning about individual stock investments, you might have to do some studying. You can read the books recommended here, or start browsing some good investment sites on the internet.

Be Careful of Investment Scams

Have you ever received mail in your mailbox that tells you that you can get a 300% return on an investment, or hype up a hot sector such as alternative energy, oil? And then, after hyping the sector (and putting down the established companies in the sector), they start to highlight a stock that nobody ever heard of saying it's going to be next big thing. You may get this as "junk" mail in your mailbox, or else a "spam mail" in your email account.

What do you do with this?

Avoid These Investment Scams like the Plague!

How does this scam work? This method is called "pump and dump." An individual or group tries to find an easily manipulated stock. Most often, this stock has very few shares traded, and belongs to the "pink sheets", or bulletin board stocks. According to Wikipedia, these stocks are:

With the exception of a few foreign issuers (mostly represented by American Depositary Receipts, or ADRs), the companies quoted in the Pink Sheets tend to be closely held, extremely small and/or thinly traded. Most do not meet the minimum listing requirements for trading on a national securities exchange, such as the New York Stock Exchange. Many of these companies do not file periodic reports or audited financial statements with the SEC, making it very difficult for investors to find reliable, unbiased information about those companies.

For these reasons, the SEC sees companies listed on Pink Sheets as "among the most risky investments" and advises potential investors to heavily research the companies in which they plan to invest.

So an individual or a group of individual would choose such a stock. Then while it is low, they would start buying the stock. Then, they would spam you by email, or send newsletters, or find any method to reach as many people (vulnerable or not). Believe it or not, there are people who may respond to the spam by buying the hyped stock. The stock, since it is thinly traded and easily manipulated, starts to rocket. At this time, the Scammers and criminals then sell the stock they were holding and profit.

This is known as the "pump and dump."

Please avoid this scam.

Not only will you save money, but you will discourage criminals and scammers to stop spamming and sending junk mail.

Please inform your family and friends, especially those who are very vulnerable to these scams.

Here's more information from the SEC (Securities and Exchange Commission) regarding these investment scams.

Stay safe out there!

How Many Stocks Should I Have in My Portfolio?

If you have an all stock portfolio, you should balance several factors to determine how many individual stocks you should have in that portfolio. These stocks should ideally be in several different sectors, or else you'll have concentration and not diversification.

1. If you have too few stocks (4 or less), you will not get enough diversification. If a single stock gets hit hard, your entire portfolio will get hit very hard. By having at least 5 stocks in your portfolio, you get better diversification. Over the long term, studies have shown that a diversified stock portfolio gets a good return with less risk.

2. If you have too much diversification, you may have difficulty keeping track of all your stocks. Owning individual stocks means you have to keep track of the situations on all your stocks. Can you manage a stock portfolio of 20?

3. If the total amount in your portfolio is not that big, you should have less positions. Otherwise, commissions will be too big a percentage to position size. Let's say it costs $10 to buy and sell a stock, and each position of a stock in the portfolio is $500. That means you are spending $20 per trade, or $20/$500 = 4%. For every investment or trade you make, you are spotting the market 4%! That's too much.

4. If the total amount in your portfolio is much bigger, you can diversify more to reduce risk.

5. If you are very young (college, early 20s), you can take a lot more risk in your portfolio. Even if you lose the money, you have time to make it up. So you can be more aggressive, and you could even buy two stocks at $1500 a position. Of course, this money should be discretionary money, and not retirement money, or money that you need.


So, to summarize, in general, Jim Cramer in his book "Real Money: Sane Investing in an Insane World", suggests having a portfolio between 5-10 individual stocks. This is enough for diversification, but not too much that it becomes too much to handle.

If you have the time and inclination, you can hold up to 20 individual stocks, but only if you can handle it.

Alternatively, you can use ETF (Exchange Traded Funds) to supplement your portfolio. You can invest in 5 individual stock for 50% of the portfolio, and in the other 50%, invest in broadbased ETFs such as EEM (Emerging International Market ETF) or EFA (Developed International ETF). This way, you can explore with 50% of your portfolio by investing in individual stocks, and the other 50% for a core ETF position or ETFs that have exposure that your individual stocks lack. For example, if 5 of your individual stocks are all US Domestic stocks, you can use the other 50% to invest in International ETFs as mentioned above.

If you don't have the time or inclination

If you don't have the time and inclination to study and research individual stocks, maybe you should consider a diversified portfolio of ETFs or Mutual Funds instead.

The Nasdaq still has room to run (Stock Chart, July 12, 2007)

The US market rallied today, with the S&P gaining 28.94 points (1.91%) and the Nasdaq rallied 49.94 points (1.88%). The S&P 500 is now at all time highs, and the Nasdaq has reached a multiyear high (still below the Bubble highs from 2000).

Looking at the chart, the different indices have broken out, with Nasdaq performing very well.

In the main window, we have the three year performance of the Nasdaq ($COMPQ). In the top window, we have the ratio between the Nasdaq Index (currently at 2701.73) and the S&P 500 index (currently 1547.70). When the $COMPQ:$SPX ratio is high, that means that the Nasdaq is outperforming. When the $COMPQ:$SPX is low, that means the Nasdaq is underperforming.

This number is best used as a contrarian indicator. When the Nasdaq has outperformed too much, then the Nasdaq is at a top. When the Nasdaq has underperformed too much, then the Nasdaq is at a bottom.

In the last three years, the best time to buy the $COMPQ is when the ratio between Nasdaq and S&P 500 is around 1.65. The best time to sell, according to the charts, would be when the Nasdaq to S&P 500 ratio goes above 1.8. These ranges nicely coincide with the tops and bottoms.

Looking at todays situation, we see that the Nasdaq has broken out to new multiyear highs, and that the Nasdaq is outperforming the S&P 500. Trends tend to continue (what was resistance before is now support), and the ratio between the Nasdaq and S&P 500 is only 1.75. According to all this, there's still room to run!

If you invest in ETFs, the QLD (double the Nasdaq 100 ETF) might be a possibility. Also, since the Nasdaq is outperforming the S&P 500, Nasdaq stocks and tech stocks might be good upside plays.

Today's Chart

Follow today's chart of the Nasdaq using, courtesy of stockcharts.com:
Nasdaq Three Year Chart

Growth in Online Computer Gaming: China, India, Korea, and Japan

China Gaming

The China Gaming market is a very big market. The Chinese middle class is growing and showing their increasing purchasing power. According to play.tm, and according to research from American Market research firm, DFC Intelligence, "analysts predict strong growth for online games in China. Following the trend of South Korea, online gaming is already one of China's favourite pastimes, but it is expected to be worth a great deal more by 2010: 1.7 billion USD we're told. That's up from a 2005 value of about 560 million USD. " "The game market in China is all about online play and charging by usage. There is even a growing market for the items used in games like weapons and characters," states Alexis Madrigal, one of the experts behind the new report."

The three main players in this market are Shanda Interactive (SNDA), The9 Limited (NCTY), and NetEase (NTES). Shanda Interactive and The9 Limited seem the most investable, having MyPEGs of 0.56 and 0.71 (very cheap). The9 Limited has the right to bring Blizzard's World of Warcraft to China. Shanda Interactive also has a good business model. According to a China online gaming survey conducted by Piper Jaffray, "55 percent of respondents said they prefer Shanda's business model, in which users can play games for free and are charged to purchase virtual items within the games. Shanda also tied with competitor The9 Ltd. as the company in its market that offers the best games."

(Analysis of Computer and Video Game Sector here.)

India

Now, what about the India online gaming market? According to a report by San Francisco based analyst and consulting firm Pearl Research (and reported by Gamasutra.com), " online games market in India will exceed $200 million in 2010, as part of a new “Online Games Market in India” report."

According to the report, the "rapid adoption of the Internet with 39 million current users; increasing broadband penetration; growth in Internet cafes with more than 100,000 outlets; and a sizable middle-class with rising disposable income. Most importantly, game operators are promoting and educating consumers about online games including MMOGs."

Local and International publishers are investing in the Indian online games market, as this is one of the few viable publishing models, where "software piracy rates exceed 85%".

However, the $200 Million Indian market by 2010 pales in comparison to China's estimated online gaming market of 1.7 Billion.

Allison Luong, Managing Director of Pearl Ressearch says that "India in 2006 is often compared to China in 2001, when China’s games market started to develop and an online games culture started to form. Within a decade, India has the potential to emerge as one of the top online markets in Asia, along with China, Korea and Taiwan."

India is slow to adopt Online Gaming

However, according to an article by John Ribeiro of IDG News Service (and reported by NetworkWorld.com), the Internet and mobile Association of India and research firm IMRB International (both in Mumbai, India), says the slow uptake in online gaming is partially caused by the "negative perceptions among parents and education institutions." Sohil Kunwar of IMRB says that "Online gaming is considered to be alien and disruptive, and to have an adverse impact on education."

In addition, Sohhil Kunwar says that India has too few broadband connections to homes. There are only 2.21 million broadband subscribers (February 2007), in a country of more than a Billion People.

Opportunity in Indian Mobile Games

In the same report, the big opportunity in India might be mobile games. According to TRAI, "India had 162.5 million mobile subscriber at the end of February. Currently, Indian mobile users can download games from Web sites but are unable to play online."

Korea online gaming

Online gaming in Korea is also very popular. Gravity (GRVY) and Webzen are two popular Korean online gaming companies. Gravity is a small cap publicly traded company (US exchanges) that provides online Games in Korea, but the fundamentals don't look very good. According to an MSNBC article, in Korea, 17 million people play games regularly in a country of 48 million. Close to 70 percent of South Korean households have broadband. And the transfer data speeds in Korea can be up to 50 megabits per second (Mbps). Compare this to AT&T Yahoo! Elite package (DSL) which has download speeds up to 6.0 Mbps. All these, plus the fact that the young people of the country have grown up with the technology help make online gaming in Korea big business.

What about Online gaming in Japan?

Japan, home of Nintendo, and Sony, are more console driven than China and Korea. So, online gaming in Japan is not as popular as it is in Korea and China.

Financial and Investing Websites

Here are a few good financial and investing websites:

1.http://www.thestreet.com
2.http://www.marketwatch.com
3. http://www.cnnfn.com
4. http://www.stockcharts.com
5. http://finance.yahoo.com
6. http://www.cnbc.com
7. http://www.morningstar.com
8. http://www.briefing.com
9. http://www.tradingmarkets.com
10. http://www.stockpickr.com
11. http://www.fool.com
12. http://www.ishares.com
13. http://www.bloomberg.com
14. http://www.seekingalpha.com
15. http://www.bigcharts.com
16. http://www.investopedia.com
17. http://www.bankrate.com
18. http://www.etrade.com
19. http://www.ameritrade.com
20. http://www.sectorspdrs.com
21. http://www.powershares.com
22. http://www.proshares.com
23. http://www.vanguard.com
24. http://finance.google.com
25. Marketocracy
26. StockPickr Blog Index
27. http://www.investors.com
28. http://www.wallstrip.com
29. http://www.bloomberg.com
30. http://www.barrons.com

Computer and Video Game Stocks: By the Numbers

The Computer and Video Game Sector

According to the Entertainment Software Association, in 2006, the US computer and video game software sales grew to $7.4 billion, tripling industry software sales since 1996. This is a large, high growth industry.

In addition, there are other reasons to be bullish on the Video and Computer Game Sector:

1. We are at the beginning of the Gaming Cycle with three major gaming consoles out (Nintendo Wii, Sony Playstation 3, Microsoft Xbox, plus Nintendo DS, Sony PSP, and other devices),
   
2. Growth in online gaming in the United States, and in other emerging countries such as China, whose middle class is growing and increasing their purchasing power.
   
3. Demographics favors growth in the industry. Generation Y is 2nd in size to the Baby Boomers, and they've grown up with games and computer and internet interactivity.
   

Demographics of the Computer and Video Game User

According to the Entertainment Software association, here are some facts about the US Game Playing Demographic:

1. The average game player is 33 years old and has been playing games for 12 years.
   
2. 38% of all game players are women.
   
3. The average age of the most frequent game buyer is 40 years old.
   
4. Age of game Players: 31% under 18 years old, 44% 18-49 years old, 25% 50+ years old.
   
5. Average Adult woman plays 7.4 hours per week. Average adult male, 7.6 hours per week.
   
6. 44% of frequent game players say they play games online.
   
7. 58% of online game players are male, 42% are female.
   
8. Those gamers 18 years and younger tend to play console games more, and those over 35 tend to play computer games more.
   
9. 32% of heads of households play games on a wireless device such as a cell phone or PDA.
   
10. 35% of American parents say they play computer and video games. 80% of gamer parents play video or computer games with their children.
    

The Gaming Console Makers

The main three console makers, Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY.PK) are not listed in the charts below because Microsoft and Sony are not pure plays on video games, and Nintendo is missing some key financial information on Yahoo Finance. I don't think Microsoft or Sony should be bought purely because of their Gaming Divisions. Nintendo, with the popularity of the Nintendo Wii and the portable Nintendo DS, might be worth researching as a stock to invest in.

Gaming Retailers

The dominant Gaming retailer here is Gamestop (GME), a very good investment whose stock has been doing well, and still only has a MyPEG of around 1. Their former competitor, Electronic Boutique, is part of Gamestop. People can buy games and gaming hardware from other places too such as Best Buy (BBY) and Amazon (AMZN), but these two companies are not pure plays on gaming.

Gaming Accessories

Logitech (LOGI) makes computer accessories and peripherals including devices used by gamers. Nvidia (NVDA) makes programmable graphics processor technlogies, many of which are used and needed by Gamers.

Software makers

Electronic Arts (ERTS), THQ Inc (THQI), Activision (ATVI), and Take-Two Entertainment (TTWO) are all gaming software makers. Atari (ATAR), Konami (KNM), and Majestic Entertainment (COOL), were not listed below because they are lacking some financial information from Yahoo Finance. Among these, from a growth at a reasonable price (GARP) view, THQ Inc. (THQI) with a MyPEG of only 0.76, very cheap. Electronic Arts (ERTS) still remains one of the major players in the gaming software industry, and sports a MyPEG of 0.95.

Mobile Gaming

Glu Mobile (GLUU) is a small company providing some games on mobile devices. Their former competitor, Jamdat, was bought out by Electronic Arts (ERTS).

China Gaming

The China Gaming market is a very big market. The Chinese middle class is growing and showing their increasing purchasing power. According to play.tm, and according to research from American Market research firm, DFC Intelligence, "analysts predict strong growth for online games in China. Following the trend of South Korea, online gaming is already one of China's favourite pastimes, but it is expected to be worth a great deal more by 2010: 1.7 billion USD we're told. That's up from a 2005 value of about 560 million USD. " "The game market in China is all about online play and charging by usage. There is even a growing market for the items used in games like weapons and characters," states Alexis Madrigal, one of the experts behind the new report."

The three main players in this market are Shanda Interactive (SNDA), The9 Limited (NCTY), and NetEase (NTES). Shanda Interactive and The9 Limited seem the most investable, having MyPEGs of 0.56 and 0.71 (very cheap). The9 Limited has the right to bring Blizzard's World of Warcraft to China. Shanda Interactive also has a good business model. According to a China online gaming survey conducted by Piper Jaffray, "55 percent of respondents said they prefer Shanda's business model, in which users can play games for free and are charged to purchase virtual items within the games. Shanda also tied with competitor The9 Ltd. as the company in its market that offers the best games."

International Gaming

There are other International Gaming plays such as GigaMedia (GIGM), a Taiwanese company, "through its subsidiaries, develops and licenses online gaming software, and provides application services, as well as owns and operates an online games portal." Gigamedia has a very low MyPEG of 0.36. Even if people don't trust the 40% growth rate, the forward PE is still a low 15.67, so GigaMedia seems like a good value with respect to its growth.

According to the American firm DFC Intelligence, online gaming is also popular in Korea. I wouldn't be surprised if there is good growth all around the world, and growth in the online gaming market.

By the Numbers

Data taken from Yahoo Finance on Friday, July 6, 2007:

Symbol	Stock Name	MyPEG	Forward PE	5 yr growth	Yield
GIGM	GigaMedia	0.37	15.67	40.00%	0%
SNDA	Shanda Interactive	0.56	19.20	27.27%	0%
NCTY	The9 Limited	0.71	19.72	25.18%	0%
THQI	THQ Inc.	0.76	17.94	18.23%	0%
NTES	NetEase	0.92	15.36	13.00%	0%
ERTS	Electronic Arts	0.95	25.84	22.04%	0%
NVDA	Nvidia	0.98	20.84	19.46%	0%
GME	Gamestop	1.03	22.46	20.75%	0%
ATVI	Activision	1.06	32.00	24.75%	0%
LOGI	Logitech	1.14	18.09	14.62%	0%
GLUU	Glu Mobile	1.57	48.79	25.00%	0%
TTWO	Take-Two Interactive	1.67	29.97	16.71%	0%

In order to understand the chart, we have to understand the different elements.

MyPEG

MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link. MyPEG incorporates the yield and cash per share.

Forward PE

Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.

5 Yr Growth

5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market).

Yield

The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.

Symbol	Stock Name	EV/EBITDA	%Short	%Inst. Own
GIGM	GigaMedia	N/A	8.20%	36.70%
SNDA	Shanda Interactive	N/A	0%	12.00%
NCTY	The9 Limited	N/A	0%	35.70%
THQI	THQ Inc.	5.45	9.80%	109.20%
NTES	NetEase	10.092	0%	1.20%
ERTS	Electronic Arts	38.214	3.40%	92.50%
NVDA	Nvidia	18.933	6%	76.30%
GME	Gamestop	14.059	3.90%	81.70%
ATVI	Activision	19.536	6.50%	95.20%
LOGI	Logitech	15.827	0%	3.40%
GLUU	Glu Mobile	N/A	2.70%	N/A
TTWO	Take-Two Interactive	75.161	38.50%	92.30%

EV/EBITDA

Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It is another measure of valuation. The lower the Better. A value of 8 or less is very good.

% Short

The higher the percentage, the higher number of people who believe the stock should go down. However, the higher the percentage, the better for those who go long because if good news is to hit a stock, not only does the price go up, but all those people who are shorting have to "cover" (Buy a stock to fulfill their loan obligation to the broker) their short position further fueling the gains. This is often called a "short squeeze".

% Institutional Ownership

People have different theories on this. Some people, like Peter Lynch, prefer a stock without that much institutional ownership. Because once the big mutual funds discover the stock, this could propel the stock to multibagger (make many times your money on your original investment) heights. However, some prefer a higher institutional ownership because that means that mutual funds and other institutional investors are already buying the stock (and may have them in their approved to buy list), and when more money comes in, they may add to their position.