Thursday, July 28, 2005


I have yelled and screamed to BUY THE BULL long enough. I started my email newsletter in September of 2002 because I was a raging Bull and I wanted others to follow my lead and make serious money. Those who followed have done extremely well.

Recently I have spent less time blogging. I have a lot on my plate. I must spend more time closing down my business, selling my house and preparing for retirement. I also intend to spend a few months preparing for and taking the certified financial planning exam. After a life-time of investing, I am confident that I can complete the course work quickly and pass the exam. When I studied at Merrill Lynch 23 years ago, I was one of few to pass the rigorous brokerage exam at the first opportunity with only 2 months preparation. Many folks have taken cram courses for 6 months or more and still failed on the second and third attempts. Ironically the background knowledge needed to pass the exam has little to do with successful investing.

Back to the point about the BULL. Many folks have lost focus. If it is not the housing bubble it is the terrorist. If it is not inflation brought on by oil and commodities it is the obvious deflation predicted by the bond market yield curve. The reality has been and continues to be that the US has gone through a metamorphoses since Ronald Reagan took office. The result has been open markets that have lowered our costs and increased productivity. Productivity is another term for wealth creation. Standards of living have increased dramatically; especially in our new trading partners.

We are now in an information revolution. The seeds of this revolution were started in the early 1980's. The next few years we will see the bulk of the benefits. All of us will win! Consumers are reaping the benefits in expanded services at lower costs. Smart investors have made fortunes already and bigger gains are ahead.

Two positions to which I have added shares in recent days were TXN and FON. Many folks are chasing small cap stocks at the wrong point in the business cycle. For the most part, the innovation cycle is over. Sure, Google and others will come up with new applications for the internet, but for the most part the wireless internet is going to be built out on platforms already in existence. TXN and FON have leading positions in this market that will expand rapidly for years to come. MOT, INTC, CSCO and QCOM are other big companies that are leading the way to wireless broadband internet.

Should one review the path of FON over the years, one can see that the company caught on early. It must have been more that 20 years ago when the company sold off its analog cell phone business and went all digital. In the near future, after the merger with NXTL, the company will spin off its land line phone business. At that point the company will be totally focused on the fastest growing part of the telecommunications business which is wireless communication. The link ups the company is making with the cable TV providers will be important profit drivers for years to come.

Many folks have been surprised by the great earnings of AMZN. However, many of those same folks will soon be driving down the road when they order goods from AMZN. Better still, they may be standing in the middle of a department store when they compare price and decide to order through AMZN. The customers will be using a portable device made by MOT out of TXN parts connected via FON. When the customer is at home the same portable device will be connected through his cable TV wireless router. Best Buy and many other retailers will do well but many customers will check prices and buy through AMZN.

I can't remember the author but a recent article in a major publication told how the big gains are being made by services that save people time. A growing percentage of the population is willing to pay more for a product or service if it saves them time. Yes, the brick and mortar businesses are growing their online sales at a fast pace but AMZN still has a great future.

NFLX just had an explosive quarter. It is amazing that the company has withstood the onslaught of Wal-Mart and Blockbuster and is the WINNER! The company has become the EBAY of the movie rental business--the most available titles and captured preferences that make users not want to change companies. Blockbuster cut the price dramatically but the loyal NFLX customers didn't move. The movie owners (companies like TWX and Sony) must eventually allow movie down-loads over the internet. NFLX will offer a few titles later this year. The loyal customer base will prefer NFLX down-loads versus VOD services from cable companies.

The other thing about NFLX is that it learns what its customers wants and provides it. The recent innovation is counter intuitive but a super success. The company has offered lower cost price plans that only permit one or two movies out at a time. The churn rate is very small on these plans because the consumers do not feel they must see a lot of movies to get their monies worth. If a customer is paying less than $10 a month, he is likely to leave the monthly draft in place even if he knows that he will vacation the month of August and not view any movies. He feels he will make up the difference in the winter when he might view 8 movies for $10.

I will write several more blogs today if I can but again, it is up to you to climb on board this BULL MARKET. I have recently discovered that several of my most loyal readers have improved their investment performance by taking some of my suggestions but they have continued to leave a lot of money on the table. I think part of the problem is that the idea of diversifying has been drilled into the heads of investors to the point that they stay in losing investments in order to stay diversified!

For example, I believe in owning small stocks over the long-term but during the current phase of the business cycle I expect large stocks to do better. Therefore, I have purchased mostly big cap stocks. As another example, I recently encouraged a couple of readers to sell residential and resort real estate properties but to add commercial real estate. One reader questioned the idea of buying real estate "during an real estate bubble". This attitude shows how easy it is to get caught-up in the "phrase of the day".

Last week INTC announced a $3 billion dollar plant in Arizona and in my own community we are watching a huge Dell plant being constructed. Folks we are in the expansion phase of the economic cycle. In this phase, factories will be built and jobs will be added. The strength of the economy will push up interest rates to a level that will make houses more expensive to buy. This does not mean that housing prices are about to drop! To the contrary, housing values will go up as payrolls are increased by new workers and raises for existing workers. It is a matter of relative performance. Commercial real estate does not require low interest rates! If Dell sees that it is about to sell billions of new computers, it will build a new factory even if it has to take out a 10% mortgage. The owner of commercial real estate will be more likely to be able to raise rents than will owners of residential real estate. Also the rent rates on residential properties are at historical lows. Why buy residential when it yields 3% if you can buy commercial that yields 8%? 8% is pretty low but if your cost of funds is 6% then the total return can be quite decent--especially if you escalate the rents over time.

If INTC, Dell and GLW are all building new factories and MSFT is about to release software that will make every computer in America obsolete is there any doubt that we are about to enter a major upgrade cycle? Come on! Investing for profit does not take the brains of a rocket scientist. It only takes an attitude of being willing to put your money where you know the odds are good.

Some will tell you that the odds are better at black jack or craps than on the lottery. They are right but the odds are still against you. The odds for long term investors in several stocks are overwhelmingly positive. You simply should not wait until stocks have reached high prices before you buy. Even if you buy at the highest price you will still make money if you continue to buy more. Use income streams to reinvest all the time. With stock earnings yields far above the yields on bonds and real estate, now it the time to add to your stock holdings!