Tessera Patent Panic: What happens when people don't read *all* the words...

EDIT: I'm now pretty damn confused because only a few were even examined originally; so it may in fact be that all that were re-exed were rejected. We'll see what that means soon enough. Or I'll lose $2k.

Tessera received an initial action today from the Patent Office that some people interpreted, once again incorrectly, to mean that their patent had been invalidated. This was exacerbated by idiots posting "ALL CLAIMS REJECTED" onto Yahoo and Google's Finance boards. Awesome.

In reality, only 7 of the 27 claims of the patent in question were dumped. And the remaining 20 were essentially re-affirmed.

Here's my full rant on the boards:

Alright, a lot of people have been fear-mongering OR unintentionally
misreading the USPTO's office action which became available on PAIR
today. (Available here: http://portal.uspto.gov/external/portal/pair
Control number:90/008,484)

Let's be clear that the SUMMARY OF ACTION clearly states that SEVEN of
the 27 claims were SUBJECT TO REEXAMINATION and subsequently REJECTED
outright.

The remaining 20 claims were "not subject to reexamination," which
actually in force makes them stronger.

Summary of action:
1a. Claims 1,5,6,17,18,21 and 22 are subject to reexamination
1b. Claims 2-4,7-16,19,20 and 23-27 are not subject to reexamination
4. Claims 1,5,6,17,18,21 and 22 are rejected.

Now before we take a look at the claim language from the actual
patent, US Patent Number 5,679,977 (Available here:
http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO1&Sect2=HITOFF&d=P...),

let's consider:
A) The patent is in full-force and effect while the case is being
examined
B) The claim is non-final office action, and Tessera will appear it
anyway

And now let's look at the claims and examine which have been rejected--
mostly the non-specific elements. Now, that's not to say that those
elements don't narrow it down to the scope of exactly what's at issue
here. It's not to say that I even know anything about the specificity
with which the patent examiner has knocked down certain claims over
others. It *is* to say that the specifics have been mostly upheld and
that MOST of the patent is intact and survivable in that form. Not
only that, but before an appeal even, those elements are "not subject
to reexamination" and thus COMPLETELY LOCKED as valid.

Please feel free to correct me if I'm wrong about any of this. I am
not a patent officer, attorney, lawyer or anyone even remotely
intelligent in any of these fields, or in trading in general. I am
just offering the facts as *I* see them, since I'm sick of reading
"ZOMG THE PATENT IS GONE" based on a 10 word wire piece. Seriously,
people.

Pre-Market TSRAing...

Action	Qty	Symbol	Price	Total		Acct Type	Trade Date	Time Completed	Settlement Date
BUY	47	TSRA	$21.46	$1,015.62		CASH	3/31/2008	8:01:30 AM	4/3/2008

Done and done. Back to bed. Happy to have bought below Friday's close, even if just barely. ($21.93)

Dropping Berk for now, but to trail or to stop...

I'm having a bit of an internal struggle with my few dollars here. I can sell Berkshire at market on Monday, and it'll likely open at $4,452 where it closed Friday. Or I can leave my trailing stop in place at 1% and have it fire at $4,407. Basically, it could cost me $45 to stay in, on the hope that it bumps up even further—not terribly likely. I'm expecting it to bounce a little bit lower, or a lot lower. It took on a nice boost on Friday. It'll level out.

So should I just exit now? Or let the TS stand?

Well, I've converted the TS from a 1% to a 31 point stop. This'll let me have a bit more granularity over the TS (on a stock as large as BRK, not being able to subdivide percentage points is a bitch) and let me realize any additional gains that may hit Monday morning.

I'm starting really wish I lived on the east coast. Waking up at 6:20am to catch market open is killing me. If you know me personally, you know that I'm rarely up before 10am, and rarely in bed before 3am, so it's rough.

Once again, just to reiterate: If I were in the market for a long-term investment strategy, I would seriously dump whatever excess cash I have into Berkshire. I just would rather keep liquid on the many other opportunities (and risk) I can play into elsewhere. And being a more active trader definitely makes this blog more interesting.

I still see BRK hitting $5,000+ in the next 6 months and $5,500 in the next year. There's no reason it needs to stop—Warren keeps building its value with solid, well-underpinned, stable growth not attached to anything as volatile as fuel and housing costs. And he always buys on the dip.

A pregnant pause... entering Tessera with no available out for 3 days... (TSRA)

Tessera is a microelectronics company that holds a bunch of patents directly correlated to miniaturization technologies used in the semiconductor industry. They receive lots of royalties and licensing fees from Intel and other major semiconductor manufacturers.

Motorola has been trying to bitch slap the patent infringement suit Tessera has brought against them, which is kinda a big deal: If the patents are indeed not infringing, there's something to be said in a worst-case-scenario kinda way that they could be overthrown entirely and Tessera could lose their current clients. Bad news.

As a result of this fear, and several USPTO re-exams tossing claims, Tessera's share price completely tanked in February, from $40 to a low of $13 in seriously about a week. Ouch.

An ITC judge issues a stay against them, which killed them further. Tessera clarified that USPTO's claim-tossing was NOT the same as overturning their patents; quite different. This helped them out a bit. But yesterday, the ITC appeals panel unanimously overturned the stay and is allowing them to go forth with their claims. That caused a MASSIVE spike of 33% (+5.44 to $21.93) Friday alone.

Here's the thing: Tessera is a pretty stable company in terms of operation and IP. They have a bunch of major players paying major licensing fees to them for their technology. An analyst at Lehman Brothers is putting a price target of $46. From an intrinsic value standpoint, you're looking around the $40s at least, where it was trading for most of last year.

What's that mean? It's a steal at twice the price, even at $22. I'm going to put my liquid $1,000 into it @ market on Monday.

The only problem is that I free-rode Friday with Red Hat. (Bought in and then sold with unsettled funds.) If I do that twice, I have my account frozen for 90 days. This is why I need to sign my margin authorization. (Margin accounts aren't held to the free-ride stipulations. Even when you're trading in cash.)

So I'm effectively locked into this one for 3 days. But I think it'll be well worth it. I'm not sure how long I'll hold onto it. Any settlement or further upward movement in this court case could cause this stock to absolutely skyrocket. If they "win" in any form, we're talking a HUGE boost. It'll reaffirm their position beyond all doubt (as opposed to the unanimous overturn which simply helped them quite a bit) AND lock in a major cash influx. Huge potential here.

And if the ITC was overturning the stay unanimously, they clearly think there's some merit there. Not to mention the fact that Intel and a bunch of others are already paying the licensing fees without a peep. Some real potential here. Not sure what I want to establish as an exit strategy; if I want to hold medium or wait for a ruling on the case... if they failed to secure a victory on the case, all hell could break loose.

Either way, I'm seeing some decent short-ish term growth on the horizon. Maybe a jump on Monday, but having the free-ride limitation might actually help me out and not panic if it slips a little on Monday. (I fully expect it to go up though; there's going to be major support @ 22 and gnashing of short-covers.)

Open Orders

Status Symbol Action Qty Order Type Duration Order Time Session QUEUED TSRA BUY 47 MARKET DAY 3/29/2008 1:45 AM Regular

Exits Completed: Red Hat

Sold Red Hat, completing my roundtrip with about my commission lost. Stupidly, I had made two initial purchase orders, tacking on another $7 unnecessarily.

It didn't move much more than its initial spike so I think I sold at a loss of $19 or some such.

Berkshire made a big move, my trailing stop is still in effect and that should lock in a tiny profit.

Looking for some new things to play with. We'll see what happens with Berkshire on Monday.

Exits all around... (RHT, BRK/B, V)

Red Hat, Inc. (RHT)
As I feared, Red Hat is a bit too low in volume to really push past a 5% gain. I bought pretty much at market open, and pretty much at its peak thus far of $18.58 and worse still, after it had made its biggest move in after hours yesterday. It's showing strong resistance at $18.80-ish, and I don't think we'll see it move past that. Trailing stop set: 57 @ 1% / $18.4734.

Berkshire Hathaway (BRK/B)
Berkshire is having it's daily spike up, as high as $4,450 when I started writing this. It's at $4,432, with me having bought in at $4,374.50. Trailing stop set: 1 @ 1% / $4,393.55, guaranteed profit of all of $20. (After commission.) Hopefully we can squeeze out just a little more, but I want some big liquidity back. I'll probably keep my eye on it and watch for it to fall to $4,200 to buy in again. It's moving up almost no matter what; buying on the dip of the range is a good call.

Visa (V)
This stock just won't settle down. Everyone expects it to perform exactly like Mastercard—to take off and break out in the next couple of months and skyrocket into the $200s. It took MA four months to move and MA had a lackluster first few months at best, opening at $44 like V, and only hitting the $50s until month 4, when it broke out in a big way:


In the meantime, nothing's moving on it and today, it's taking a bit of a hit, trending downwards and unable to gain any ground on its rallies. We'll see where it lands. Trailing stop set: 35 @ 5% / $60.268

Let's play the earnings call game... Buying Redhat (RHT)

Redhat announced that they bested earnings expectations by 7%. Quarterly earnings calls almost always come with a fun shift in the stock price: up for beat expectations, down for missed expectations. Naturally, this is an oversimplification. A stock's last few quarter's performance, it's market capitalization, the amount by which it missed or exceeded and of course, random market entropy all come into play.

But it's typically one of the safer bets you can make.

I'm hoping for a 5-10% bump and I'll roundtrip it if it gets anywhere near to that. After hours pushed +1.27 / 7.24% already, so the most of what we'll see may have already come and I could be buying into a sell off. Or we could see some shorts covered and a nice spike that nets me a small profit.

I'm only buying $1,000 worth, since that's all I have in "liquidity". In fact, I don't even have that; I have $500 in settled funds and another $500 in unsettled, pending funds. (From today's GOOG & AAPL sales.) The Federal Reserve's Regulation T requires me to have the funds settled before I can buy and then sell a new set of securities with the proceeds of an earlier sale.

Example: While I can buy 29 shares of RHT with the proceeds from my GOOG/AAPL sales, I cannot sell the position until the sales have settled, in three days. If I do, it's considered "free-riding" and it's a no-no; two instances locks an account for 90 days. I'm willing to take one instance to get a nice profit in.

I'm also completing a margin application, since you can get around this provision with a margin account.

The other thing I need to watch out for is the pattern day trading rules. If I perform 4 roundtrips (in and out of a position in the same day) within any 5 day period, my account converts to a "pattern day trader" account, which requires a minimum equity amount of $25,000. The punchline? They issue a fucking trading equity call for the difference if you don't have the $25,000. Or they close your account. Woo regulations.

Trailing stops triggered: GOOG & AAPL sold

SELL	1	AAPL	$141.47	$134.46			3/27/2008	1:38:28 PM	4/1/2008
SELL	1	GOOG	$446.00	$438.99			3/27/2008	9:30:01 AM	4/1/2008

The trailing stops I had established for both Google and Apple triggered today, at $446.00 and $141.47 (or $438.99 / $134.45 after commission.) I had purchased GOOG at $435.94, leaving a whopping profit of $3.05, and AAPL at $130.35 leaving a profit of $134.46. I specifically set the trailing stops to trigger once I had hit my near-breakeven point, after commissions.

In the end, Scottrade made more on these than I, with $28 in total profit. This is why I need to be entering in at more than one share a trade volume.

Visa's next on its way out and then we'll see what happens with Berkshire. My extra, boosted deposit cleared its withdrawal after settlement, putting me firmly at $7,687.24 / $7,500.00 or up about $187.24 or nearly 2.5% in about two weeks. Not bad. Need more plays like Bear Stearns. In. Out. Quick turnaround. Closer to day trading. But that also brings a lot more risk with it. We'll see what happens.

And I'll make an AAPL/GOOG play before their earnings calls later next month. Which way I'll bet is anyone's guess. Hearing some scary things about Google's Q1 results, but AAPL might be hot. On a day with exceeded expectations, you can always expect a 5%+ gain. Likewise a loss on failed expectations, for certain.

Nothing much.

Some nice gains today. No trailing stops triggered. I'm bumping up my V trailing stop I think. (I actually converted it to a straight stop.)

It's still finding its place in the world, so to speak, and that place is probably under $70. Needed more liquidity to play that right but alas.

I'm keeping this one short—huge presentation in just a few hours. Wishing Berkshire would bounce back and still considering canning it for now and playing around with a bit more liquidity in the short term.

Thoughts? Worth the maybe-it'll-hit-$5,500 (gain of about $1700) within a year to hold onto it? Or can I make more with a bunch of smaller, high-octane, higher risk plays?

Am I too young, so to speak, for Berkshire?

Preparing my exits...

Symbol	Last price	Change	Shares	Cost basis	Mkt value	Gain	Gain %	Day's gain
AAPL	140.98	1.45	1	123.35	140.98	17.63	14.29	1.45
GOOG	450.78	-9.78	1	428.94	450.78	21.84	5.09	-9.78
BRK.B	4300	-41	1	4367.5	4300	-67.5	-1.55	-41
V	63.1	3.37	35	2273.95	2208.5	-65.45	-2.88	117.95
				$7,193.74	$7,100.26	($93.48)	-1.30%	$68.62

Someday, I'll figure out how to accurately represent my performance in the market. The above Google Finance output, for instance, doesn't much care about my BSC deal which netted me $280, instead highlighting that I've lost on V and BRK.B.

Visa had a decent day today and didn't hit my STOP for it. I've established 3% trailing stops for both GOOG and AAPL, which will put me at an extremely meager profit for each of them; it's stupid to be playing with that cost with such low volume. The commissions make it completely inefficient. Lesson learned.

I'm also considering pulling out of BRK.B. It's not underperforming or anything; I expect in a year or less it'll be breaking $5,000 or more. It's just boring and I think tying up that much capital is a bit of a pain when I have such little to work with. It's a decent hedge though, and keeps me from blowing everything at once. But if I play smart and keep my eggs in separate enough baskets at all times, I'll be fine. I may exit once it pushes past my commission-break even. Meh.

Visa stings, BSC turns out to be a good call...

AAPL	139.53	+6.26	(4.70%)
GOOG	460.56	+27.01	(6.23%)
BRK.B	4,341.00	-6.88	(-0.16%)
V	59.73	-4.62	(-7.18%)
BSC	11.28	+5.32	(89.24%)
Value:	7,031.64	-135.31	(-1.92%)

Some confusing numbers up above, due to Google knowing I was only holding BSC for the day and neglecting to report any of my profits on it because it's technically no longer in my portfolio. At the very least, you can see that the market had a strong day in general with Google leading the charge up $27.01. Apple was healthy as well at $6.26/4.70%. But Visa met with some nasty downtrending with someone apparently selling heavy into the rallies that would've otherwise drove it up.

As a result, I've gotten dangerous close to my 15% trailing stop. And as a result of that, I think I'm going to switch it to just a flat stop at $57 to buy myself some cushion (about 50 cents worth) tomorrow. I'm predicting it bounces heavy tomorrow—a lot of people want this for a long term buy and were waiting for it to drop below $60 before buying in. Now will be their time and hopefully I can exit the position around $70 or $75, or at least establish a nice and healthy trailing stop there.

I won't let it drop below $55 at the VERY least though, and I'm going to set the stop loss at $57 right now. It'll suck to lose just about as much as I made today on BSC, but that's how things work. (It's more or less just frustrating because I think a bounceback is imminent, but waiting and wishing doesn't make it so.) (Okay, I lied. $56.75.)

Symbol	Action	Qty		Order Type	Order Price	Duration
V	SELL	35		STOP	$56.75	GTC

Bear Stearns bump & the exhiliration of day trading: Buy at open, sell at resistance, make 27.7% profit!

Action	Qty	Symbol	Price	Total			Trade Date	Time Completed
SELL	74	BSC	$12.64	$935.34			3/24/2008	10:24:52 AM
SELL	130	BSC	$12.6674	$1,639.74			3/24/2008	10:24:52 AM
BUY	204	BSC	$9.85	$2,016.40			3/24/2008	9:57:54 AM

To summarize, in for $2,016.40, out at $2,575.38 for a shared profit of $558.98 or $279.49 (27.7%) for my brother and I, each. Woot.

I couldn't get in to pre-market trading levels; by the time I woke up at 6:20a (9:20 EST), it was trading at ~$9.91. (And my money transfer hadn't completed yet.) Was forced to enter in at $10.70 because that's where the ask was, so I placed my order for 204 shares at market. Trading was halted on BSC for the first 27 minutes, which completely freaked me out, since I placed my market order at exactly 9:30:00 and just saw it hang.

I know I said I wouldn't buy above $8.50, but I knew there would be covering shorts and other excitement. I didn't expect the halt and that scared me a bit, but then they lifted it and my trade went through at $9.85. I watched it start to bounce and news came through that the deal with JPM seemed solid at $10/share. Good, I made at least 15 cents a share in almost any event. At the very least, we weren't going to see another offer come through at less than that value, or at less than my $9.85.

Then something interesting started happening: the stock upticked like crazy. I'm guessing a combination of covering shorts, an even slightly (or immensely) bigger deal coming or some insanity pushed the stock all the way up to the $13 range. I saw it start to dip and bounce off of a resistance point of about $13, so I exited the position at market, which was fulfilled in two blocks: 74 @ 12.64 and 130 @ 12.667. (It *briefly* spiked to $13.85, which means that if you had gotten in at pre-market around $6.40... well, damn.)

All in all a good showing of $279.49 on $1,008.20 invested, *after* commissions.

I'm going to pull my $1,000 back out since it was from my savings and not part of my active trading cash. I'll ask my brother what he wants to do with his. Good times. I can see how this is addictive. Now, if an offer comes through for $25/share or some such, it'd have been crazy to still be in so I won't feel bad. There are far too many "what ifs" in this game to beat yourself up over it for more than just a few minutes. It's trading around $12.05 now (8:14/11:14a) but I'm happy where I exited.

Jumping on the Bear Stearns (BSC) bandwagon: Market volatility ahoy!

It's being reported that JP Morgan (JPM) is beefing up their offer for Bear Stearns to closer to $10/share—not a huge surprise considering the massive backlash from BSC shareholders at the thought of a $2/share offer. (The wisdom at the time being, I suppose, any offer is a decent offer. Indeed, an offer worth less than the very building you're occupying is not a decent offer under any circumstances. The shareholders realized this and weren't about to let JPM pillage in such a greedy, "let us rescue/rape you" manner.)

With that, I'm expecting a huge bump in BSC tomorrow. As such, I'm throwing $1,250 of my money and $1,000 of my brother's money into the pot at open, provided it doesn't gap up and over $10. In fact, I don't think I'll enter the position if it opens at anything greater than $8.50/share. (Note: my brother is in stock market class and has been following the BSC situation closely. I have also let him know that there is a VERY real risk he loses all of his investment, completely. He understands that and is willing to take the risk. The parents have given their blessing to him as well.)

Entering the position at more than $10/share would be a big error in my particular circumstance. While many are speculating that another offer may come through, or that JPM may strike closer to the $12-$25 range, I'm not looking to play that game. A lot of people who bought in at $4 are going to be happy that they've held on; their bets have paid off that a $2 offer wouldn't stand. Now we'll see another round of people looking for the same stroke of luck.

As the situation surrounding Bear becomes more clear and their liabilities and liquidity come to light, a more accurate value will emerge. Again, $12-$25 has been rumored by Barrons and CNBC. If that's the case, the stock could easily leap right over $10/share. Or it could spike to $9 and hover there while everyone figures out what's going on with this revised "deal."

This is all an elaborate guessing game. Clearly, the company is worth more than $2/share if their building alone is worth more than that. What everyone's gambling on is what is it *really* worth, to JPM or another suitor?

Game plan, if at all possible: Buy at open at market (assuming that's under $8.50), sell if it breaks $10 at all or crashes beneath what I entered at. (A 20% gain would of course be fantastic; buying at $8.50 means $10.20 hits the 20% threshold.)

Very real possibility: Pre-market trading and gapped demand will drive the open price up right around to $10. It will jump up a very small amount, but could also settle back in the $9 range. If that happens, we'll stay out of it altogether I think.

Fun with trailing stops...

Open Orders

Status Symbol Action Qty Order Type Order Price Duration Order Time Session OPEN V SELL 35 TRAILING STOP 15% $54.6975 GTC 3/21/2008 4:25 PM Regular

Today's a holiday so nothing going. I've placed a trailing stop (more on them here) order for 15% on my Visa holding, since I want it to be a medium-term play and while the market settles, it could have some volatility yet. If it drops 15% or more at any point, a stop will trigger a market order to sell all 35 shares I own.

What makes it a trailing stop is that the "15%" mark is relative to the high point for the stock. As the stock's price increases, the stop "trails" or moves with it, providing a moving safety net that allows you to lock in profits. The order price is listed at $54.6975 because that represents the current 15% stop loss level. And if it triggers that, it'll suck and I'll lose some money, but if it collapses back to $50 or some such, I'd lose quite a bit more. I can always rebuy on the dip. Or, perhaps not buy on the peak in the first place. :-)

The GTC indicates that it's "Good Til Canceled" which is pretty self-explanatory. We'll revisit this order next week and see what happens with good ol' V.

BRK Bounceback...

AAPL	133.27	+3.60	(2.78%)
GOOG	433.55	+1.55	(0.36%)
BRK.B	4,347.88	+82.63	(1.94%)
Value:	4,914.70	87.78	(1.79%)

Berkshire was bouncing around a bunch today. Of course, looking at it every day is purely an academic exercise since I'm not touching it. Could've averaged in over the past two days when it was in the $4,200 range, but that only works for long-term positions and I'm not looking to tie up another $4k.

*Someone* thought well to buy in on a bit of a low point for [BRK], pushing it up $82 in a series of big buys towards the end of the day in rapid fire.

My buy of [V] (which isn't showing up above because I paste that from Google Finance who isn't yet allowing you to add [V] as a portfolio symbol yet) of 35 @ 64.97 smarted just a touch by close @ 64.24; it hit its resistance right about there but damn if I didn't think it'd push past the 15% gains mark.

Holding Visa short-term...

Well, I went ahead and bought 35 shares of Visa [V], regrettably @ 64.97 (as it's kicking back down a little bit, nice.) I tried to place a market order last night for open @ 58.33, but I didn't have my funds settled yet and couldn't. I should've bought earlier today, but instead kept waivering and finally decided to pull the trigger at the top of the curve. Stupid, but I think it's going to bounce into the 70s next week.

If it drops below 59, I'll sell. If it hits 75, I'll sell.

Considering Visa...

AAPL	129.67	-3.15	(-2.37%)
GOOG	432.00	-7.16	(-1.63%)
BRK.B	4,265.25	-40.25	(-0.93%)
Value:	4,826.92	-50.56	(-1.05%)

Correcting from the high yesterday, as expected.

I'm considering pushing a medium play into Visa [V]. They just had their IPO two days ago and they're hovering in the $56 range, having opened at $44. I'm thinking in the short term, they could range up to near $70-$75, but that'd mostly be on hype. I've heard some back-of-napkin value calculations putting their actual value at $40 and that's a big hype bubble to hope for. Either way, let's check back in in a week. I'm predicting mid-60s by this time next week.

(Baseless guess: small gain tomorrow, minor correction to follow, more growth back the next week.)

Liquidity limitations and considering jumping to ThinkOrSwim as my brokerage are all that's keeping me from buying. Let's see how I'd do in imaginary world, assuming I could buy 40 shares at open, shall we?

What happens to Berkshire Hathaway when Warren Buffet dies?

The Oracle of Omaha is 77 years old and though he's "never felt better," a lot of people wonder what will happen to Berkshire Hathaway both from a share value/price perspective and an ownership/succession perspective.

Berskhire is a fascinating holding company because of how closely it represents the genius of one man. Mr. Buffet has built the organization in a manner that intractably reflects what he deems to be in the best interest of himself and equally, his shareholders. He guides all the plays and is wholly involved in every decision—he's not running things from the sidelines; the success of BRK is his, near-completely.

When he dies, BRK will slip quite a bit; perhaps as much as 20%, knock on wood. That day will represent the best single day one could buy BRK because of one simple concept: intrinsic value. The pure, intrinsic value of Berkshire is the mark-to-market value of all of its holdings at any given point. Mr. Buffet or no, the company's holdings value is closer to the $5,500-$6,000/B-share mark. BRK stays out of high risk, high-liability holdings by its nature and has a lot of flexibility/cushion from its wonderful insurance float. Because of this, it has high earnings, low debt and immense stability even when facing recession (an opportunity to buy up undervalued, high-potential companies, says Buffet) or in the face of inflation.

That said, there is some very clear, high value add from Mr. Buffet's leadership. While there are others intimately acquainted with his strategies and approaches and ethics towards running the company, he has professed an exception quality of wisdom and patience with a flair towards risk aversion and greed aversion in just the right quantities. While he maintains a list of his own hand-picked successors should the need arise, we can only hope that they'd be wise enough to continue using his formula and stay the course.

Which is to say, beyond an initial massive shock in the market and BRK at large, (if that; most BRK holders know Warren's approach and succession plans and would likely not be too phased at first) the stock will recover swiftly because of how undervalued it will quickly become. What happens past that will be in large part a function of who is named successor and the confidence level a passed on Buffet is able to instill in shareholders in them, in addition to how they perform straight away.

For now, I'd much prefer Mr. Buffet alive and well. As he says in his BRK owner's manual:

Lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire, and if enjoying life promotes longevity, Methuselah’s record is in jeopardy.

The Fed cuts interest rates, Goldman Sachs & Lehman aren't bleeding so bad, everyone's happy!

AAPL	132.82	+6.09	(4.81%)
GOOG	439.16	+19.29	(4.59%)
BRK.B	4,305.50	+60.50	(1.43%)
Value:	4,877.48	85.88	(1.76%)

On news that Goldman Sachs and Lehman Brothers aren't eating it quite as hard as everyone (themselves included) expected, and the Fed cutting yet another chunk out of the intra-rate, there was much rejoicing today as the Dow climbed 420 points.

Lehman Brothers (LEH) climbed 13.76 to close at 45.51 for a 43.34% gain on the day. Damn. Bear Stearns had some help with more short covers and rumors of a higher deal. More talk about how "orderly bankruptcy" would net shareholders more than the paltry steal-at-twice-the-price $2/share ($250M *total*) JPM offer kept hopes for another offer up and optimistic. (The shareholders have to approve the JPM deal and 30%+ of BSC shares are owned by VERY FUCKING PISSED OFF BSC employees. Others aren't so sure.

(Fun side story: My brother Steve is playing a stock market simulator for his stock market class in high school. I told him last night that BSC was going to rally today while holding on for a deal. His simulator doesn't let him place orders under $5/share to prevent massive swings on highly volatile penny stocks, etc. So, since BSC closed at $4.81, he places a limit order at $5, thinking as soon as it passed by $5, his $25k play money order would be executed and he could ride the wave. Except that after-hours pushed the open to $5.50, the limit never triggered and he didn't get in til $6-or-so, losing on the day. BSC peaked at $8.50 and would've made a hefty sum for the wise. The question is if you're going in, do you hold your position long for hope of a better deal, or exit at the quick 45% profit? BSC closed $5.91, up $1.10/22.87%; not bad for a day's work either way.)

A lesson in short selling stocks & more fun with Bear Stearns...

AAPL	126.73	+0.12	(0.09%)
GOOG	419.87	-18.05	(-4.12%)
BRK.B	4,245.00	-73.05	(-1.69%)
Value:	4,791.60	-90.98	(-1.90%)

If I was a bit more active and a lot more forward thinking, there would've been a bundle of money to be made shorting Bear Stearns on Friday. At any point during the day.

(A quick intro on shorting: Shorting or "short selling" a stock is what empowers speculators to make money on a downward moving stock. Essentially, you borrow a share at the current market price and sell it to a buyer. You then promise to produce the share at a later time, ideally once the price has lowered. You're contractually obligated, however, to produce the share whether the price goes up or down.

Example: I sell you a share of Bear Stearns for $50. I don't actually own the share; I'm just "borrowing it" for the moment at that price to sell it. I'm contractually obligated now to pay for the share at some point or another, to cover the short. So, if the price drops to, say, $35, I can cover the short (fulfill my obligation to provide the actual share I already sold you) for $15 less than I sold it for. I sold you a share for $50 that I paid $35 for, but I had to wait for its price to go down to make any money on it.

There are plenty of issues with selling short. Least of all is that, instead of a typical long position in the market, in which you can ONLY lose what you put into it (excepting purchases on margin, where you borrow broker money) and your potential earnings are unlimited—the stock can continue to go up forever. In a short, I can sell you a share at $10. If the price of the stock rises to $100, I still need to cover that sale, except that I have to do so at the market price of $100. I'm out $90. Worse still, I can only earn a MAXIMUM of 100% of the stock's value, and that's only if it bottoms out completely to 0. I can't earn any more than that.

So I have exactly the opposite risk profile: potentially unlimited risk with limited earnings. (In actuality, the broker would issue a margin call once the price raised past a certain point to ensure that you covered the short before it reached a point you could no longer cover.)

That being said, I could've made a bundle selling short BSC. There was chatter of it bouncing back to life on Monday, with BSC moving their earnings call forward, but then the news broke that JPMorgan Chase was buying them for $2/share. From $30, the deal forced an open at $2/share.

So why did it end up closer to $4? People covering shorts, but only a small portion. A lot of people are viewing it as a cheap lottery ticket at this point. There's talk of another suitor coming along with a better offer. Consider: If you buy a 1,000 shares at $3, and another firm offers $10/share instead of the $2/share not yet approved by shareholders, you've made $7,000 effectively. Brilliant.

Why would shareholders or even the corporate governance of BSC reject the deal? The bailout facility set up on Friday covers them for 28 days. It's backed by the Fed. The 43 story building that they occupy on Madison Avenue in Manhattan is worth more than the $250M JPM offered to pay for the entire company AND all their assets. Effectively, this makes bankruptcy/complete liquidation a more attractive option for the shareholders. (If you can get more than $250M for the building alone, mark-to-market, then liquidating can provide more value for your shareholders if debt obligations are met properly.)

Either way, the market is taking a nasty hit. Hopefully things correct a bit tomorrow and hopefully the Fed let's failure fail when it's due.

Bracing for a rocky day...

JPMorgan Chase announced today that they'd in fact be buying Bear Stearns. No, not for the $15-$20 a share earlier speculated. They're paying $2 a share.

Now there has been a lot of ire raised by the Fed's bailout of the "brass-knuckles" investment bank. They've played the risky hand and they've lost, hard. Should they be bailed out? Should any large investment bank?

The question is one of externalities. The Fed financed the bailout because they fear gravely that a full-blown collapse of BSC will lead to a bank run elsewhere. Others will overreact (or, perhaps, react accordingly) and pull their money from similarly over-leveraged, high-risk, subprime-touching, perhaps-starting-to-experience-liquidity-issues investment funds.

Bank runs are never good. Banks don't ever have the liquid assets necessary to pay out all of their accounts, a nifty concept called Fractional-reserve banking. When
everyone tries to pull out their money at once because they fear the bank has or might become insolvent, the bank can no longer pay out all of the requests and becomes insolvent. This is the basis of the FDIC, which insures on a federal, government-backed level that your deposits are safe in FDIC-insured accounts. Even if your bank bottoms out its liquidity and nears insolvency, the FDIC has your back. The confidence this provides can help avoid bank runs entirely. The problem is, investment banking accounts like those at BSC aren't FDIC-insured. (With good reason.) So in effect, the Fed is backing up the funds in order to keep BSC solvent and operational long enough to get things in order.

The other side of the coin is that without the risk of epic failure, a bank's investment managers will act more in the interest of themselves and attempt much higher risk behavior. If you've ever played a "play money" stock market or poker game, you know that there are people willing to throw all of their money towards something nonsensical, just for the hell of it. Maybe it'll pan out, and it doesn't cost anything. This is an exaggerated scenario, but without real risk and true negative reinforcement, fund managers may subconsciously or worse, consciously, consider the Fed a safety net to protect them while they try far riskier activities than they've considered before.

Now, if the failure of Bear Stearns truly were about to cause a run on several other similar-profiled but not-as-illiquid funds/banks, then the Fed did the right thing. I'm just not sure that would happen. This didn't come out of the blue. BSC announced massive liquidity issues days after having lied about their "liquidity cushion" at the highest level. The other firms haven't, though the "cushion" reassurance did come from an SEC officer, which concerns many more than a little. Still, I'm typically in favor of letting the market dole out its punishment. This was a body blow that BSC earned themselves. They were smug and indignant with Long Term Capital Management experienced a bank run and completely collapsed in 1998, saying that the Fed should have nothing to do with it and that they'd offer no help whatsoever. Well, their risky chickens have come into roost and damn if they're not more than a little diseased.

Tomorrow may be a very rocky day. Or the JPMC deal could be a shot in the arm for many who see that the BSC problem is no longer a federal one and that it will be dealt with soon. Watch the Dow, JPM and BSC tomorrow. (And enjoy another Fed rate cut, sure to impact your savings account rate soon.) I'm expecting the former more than the latter.

A lesson in subprime lending & the epic fail of Bear Stearns...

AAPL	126.61	-1.33	(-1.04%)
GOOG	437.92	-5.09	(-1.15%)
BRK.B	4,318.05	-15.95	(-0.37%)
Value:	4,882.58	-22.37	(-0.46%)

So as everyone's now discovering, it appears that when you loan money at extravagant and upwardsly-mobile rates to individuals who have proven they're not so good with the "paying bills" thing (that is, "subprime" borrowers), it turns out they don't pay their bills.

Now this is a pain in the ass with cars and credit cards and shit. It turns out, it's a HUGE problem when people just stop paying for the houses they're living in. That's right: let's take nearly the riskiest group of borrowers and give them rates that adjust UPWARDS (while their income stays static) and hope they can continue to pay their bills.

This started to be a big problem especially when house prices started to tank after many refinanced in order to continue on and enjoy the equity they had built up.

Now, I'm all about letting the market handle itself. It's a bit of a meltdown, but the lenders have no one to blame but themselves. They had all the data available. They knew what they could wring out of these people and they pushed too far and appear shocked, SHOCKED, I say when the actuary tables didn't quite bear out.

So we're stuck with epic fails like Countrywide, Nothern Rock, Citigroup and today, Bear Stearns. The investment bank has had plenty of comeuppance since June of last year when they were forced to pledge a $3.2B bail-out loan to one of their funds heavily invested in collateralized debt obligations.

Because these bad boys are held on a mark-to-market basis, (which essentially means that they're only ever worth what you can get for them, not what you paid for them; as a side note, a fancy way to commit accounting fraud if there is not day-to-day market available to peg the price at) the funds turn out to have a hard time paying down the loans, since no one's buying the damn houses. Kind of an oversimplification, to say the least, but at the end of the day, Bear Stearns hit the panic button and got themselves another buy out from the Fed and JP Morgan Chase.

And the market ate it, slipping back under 12,000, to the pre-the-fed-will-inject-$200B-rejoice levels from the end of last week. Way to CTRL-Z the fuck out of that one, Bear Stearns. Bear indeed.

The Bear Stearns Companies Inc. (Public, NYSE:BSC) - Discuss BSC

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30.00 -27.00 (-47.37%) HEY-O! Mar 14 - Close

Oh, this is all by way of saying that the market slipped heartily and thus did my meager holdings. No moral of the story; I'm getting sick of hearing about subprime fails.

Southwest stays stable, not much movement elsewhere...

AAPL	127.94	+1.91	(1.52%)
GOOG	443.01	+2.83	(0.64%)
BRK.B	4,334.00	-23.00	(-0.53%)

So, minor movement across the board today. This will be a lot more fun space to watch once I've put the other $5,000 into the hat ring. Since these are longer term holdings and little's going on, they're not particularly volatile and are tracking the Dow pretty closely. (Excepting BRK, which'll do its own thing.)

I'm also working on getting the portfolio view back up. The site I was using for the widget is apparently hosted in a cave with sketchy internet and it breaks the whole sidebar when it refuses to load. Cool.

Southwest's plane groundings made the front page of the Arizona Republic today. That's some rough stuff. The situation, as I understand it is that a combination of bad records keeping and a few missed maintenance cycles lead to some missed checks (or reported missed, but actually met in a few cases) for cracks in the fuselage. These cracks can form in planes once they hit their late 20s-30s and lead to a shearing off of chunks of the fuselage, which looks like this.

Now that they've been able to perform the requisite checks on the planes, it's been determined that four needed some repair work, while the rest were returned to service.

Still, LUV gained 0.21, up 1.83% to 11.70. Customers will remain a bit concerned, but this is a wakeup call of the best kind: no lost planes, no lost passengers. They'll pledge to do better and at $10M to the FAA, I think they'll comply. It's really in their best interest—they want to keep their flawless air safety record alive.

Berkshire slips, little other movement and watching Southwest drop a few thousand feet...

Symbol	Price	Change ($)
BRK/B	$4,357.00		-43.00
GOOG	$440.18		0.35
AAPL	$126.03		-1.32

Not much movement on anything but Berkshire today, which slid 43 points. Google was up to +5% earlier in the day but came back down to finish up just 35 cents. (Of course, Berkshire and Apple actually moved about the same amount, percentage-wise: -1%.)

Another stock on my watch list had a tumultuous day to be sure: Southwest Airlines (LUV) dropped 7.34%, or 0.91 to 11.49 on news that they were grounding as many as 43 planes for "safety reasons". This represents a bit of an issue for them, as the FCC revealed just last week some inconsistencies with their safety practices that they had up until now staunchly denied. In addition to grounding the planes, they fired or put on leave 3 individuals within the company partially responsible for maintenance and safety practices.

Southwest is one of the nation's safest carriers. They've never had an in-flight crash or fatality (though they've slid off the runway twice, with on-ground fatalities in at least one of those occasions; both were pilot error in inclement weather if memory serves) which is saying something, considering they carry the most domestic passengers.

That said, no one wants to hear that your favorite airline is cutting what everyone agrees are pretty damn critical corners. Cracks in the fuselage can't be ignored; stress fractures can cause planes to rupture and has in the past, though for different airlines. Ironically, on my last trip to Vegas, our plane was pulled for safety reasons just as we were about to board. Something about it being "not airworthy." I'd much rather they make that call *before* I get on the plane, than learn the hard way.

I'm anticipating we'll see a bit more of a slide for Southwest as the full details of the issue at hand emerge. Grounding 43 planes is a ridiculously expensive exercise as well and may have an impact on earnings for the quarter, no matter the length of the grounding.

Southwest has been one of the best performing stocks consistently for the last 30 years, right up there with Wal-Mart. They're on my watch list because they're typically very smart about how they run their business. Even when all the other airlines were busy declaring bankruptcy, Southwest was making a profit consistently. (In fact, they've reported profits for every quarter in the past 30 years, missing once I believe in 2002.) They leverage their purchasing power to buy fuel futures to help absorb rising fuel costs—a move they've played far better than their rivals, and it's shown. The hedging and cost structure changes aren't quite as powerful lately and haven't translated to good times for their share value, but it'll still help them long term.

I'll be looking to pick up some Southwest once the dust settles from this and barring any of their planes dropping from the sky. If anything, I anticipate will help undervalue the stock enough to make it worthwhile to get in cheap. It's been lackluster for the past two years and might be primed for an uptick if they can avoid getting wrung out too harshly from the groundings.

Starting up...

Today marks my first official foray into the murky depths of investing. I'm keeping this blog as a sort of stop gap, to enforce critical thinking about my decisions and to give me a good record of what the hell I was thinking at any given moment. I'm anticipating there'll be a healthy dose of rationalization when I experience some losses, but that's all part of the fun.

A little about myself: I'm 22 years old and run a web development company. I've never invested in anything except a middle-of-the-road online savings account which, thanks to the fed, is currently only yielding 3.55% APY. I think I can do better.

I've started off by transferring $5,000 out of my savings account and into my Scottrade account and making a few buys:

Symbol	Action	Qty	Acct Type	Price	Total
AAPL	BOUGHT	1	CASH	$123.35	$130.35
GOOG	BOUGHT	1	CASH	$428.94	$435.94
BRK/B	BOUGHT	1	CASH	$4,367.50	$4,374.50

So, one share each of Berkshire Hathaway, Apple and Google.

Berkshire Hathaway, for the uninformed, is Warren Buffet's company. It's a mega-conglomerate that owns a great deal of holdings across a bunch of different industries. Warren has built up this portfolio in a strikingly intelligent manner and managed the business with a flare whose genius I'm sure I don't quite yet comprehend.

After reading his shareholder Owner's Manual (PDF), I found myself really, really liking his approach and perspective. It seems so straightforward, but a lot of what he espouses (slow, long-term, stable growth) is sometimes lost in the fray and trampled by greed nowadays. He makes it absolutely clear that he intends to build the true value of the company by working diligently to improve operations, properly manage float (a great deal of which is provided by GEICO) and by letting the managers at each organization do their job, relatively hands-off.

BRK/B indicates that I bought a Berkshire Hathaway Class B share. A Class B tightly correlates to about 1/30th of a Class A share, though it only holds 1/200th the vote Class A shares maintain. Class A BRK is trading roughly at $131,940. Per share. Needless to say, I'm not exactly able to afford one of those right now. (The stock is at such a high value because it has never split, a tactic further representative of Warren's ideal that you should be in BRK shares for the long haul. It's his nest egg and he wants it to be yours, too.)

By the end of the day, here's where I ended up:

Symbol	Qty	Price	Mkt Value
AAPL	1	127.3501	127.3501
BRK/B	1	4,400.00	4,400.00
GOOG	1	439.8399	439.8399

Total Market Value:$4,967.19

So roughly up $47.40. Less the $21.00 in trading fees, I'm looking at $26.40 profit, or, you know, roughly 0.5%.

My outlook on each of these positions:

Berkshire
I'm going to hold onto BRK/B for the long-term. I've heard some really encouraging things the point to a proper valuation closer to $5,500-$6,000. Some people believe it'll hit that by summer, most people agree it'll get close to that within 18 months. Naturally, people believing isn't enough to make it so, but Berkshire is often considered relatively inflation- and recession-resistant. Mr. Buffet explains as much in the aforementioned Owner's Manual: A recessed market allows Berkshire to pick up on some great deals and buy out some very undervalued companies when the time is just right.

Berkshire should represent some significant growth and present as a relatively low-risk position for me over the next year or so.

Apple
Apple's taken it in the shorts since the beginning of the year, sliding 70 points and about 35% from its 52-week high of $202.96. Ouch. Why? A bar set a bit too high, and a penchant for missing expectations. Apple has delivered with the iPhone—an incredibly popular device that should represent a consistent money maker for them. Their latest line of Macbook Pros are gaining market share and since the switch to Intel-based chips, they've seen incredible adoption rates.

So where have they gone wrong? They've had some issues keeping the residuals up with the iPhone. Users are abandoning AT&T and in doing so, cutting Apple's residual check from the telco. Apple's CFO Peter Oppenheimer played the spin game with this issue a few days ago, stating that they viewed it as a positive thing: an indicator of future demand. That's all good and well, but perhaps Apple should be looking for a trap door out of their contract with AT&T that would let them also receive residual kickbacks through T-Mobile. TMO would love to sell the iPhone, I'm sure, and unlocking the device isn't exactly a basic task, though some software is available that makes it much easier.

Add to that a lackluster MacWorld in January, where the best thing going for Apple was a thin-and-not-too-functional version of the Macbook and you see why investors aren't the most excited right now. But watch: we'll see the iPhone continue to be a great seller. Apple will release higher capacities and continue to evolve their iPod line. And they'll continue selling Macbooks and Macbook Pros like hotcakes.

About 45 minutes ago, some news came off the wire that the government of Japan was investigating a potential defect in the iPod nano that may cause it to, you know, erupt into flames. That could ding the share price tomorrow, but I'm guessing it won't have too big an impact. Apple's due to bring back some value, and I'll probably sell if it gets close to $165 or drops below $100.

Google
The GOOG has taken about the same thrashing since the start of the year as Apple. We're talking a very similar story: down 271 points, about 38% from a near-52-week-high of $710 on Dec. 26 to a 52-week-low of $413.62 yesterday. It rebounded today a bit to close at $439.84.

Google's taken such a beating because they simply couldn't keep reporting exceptional growth quarter after quarter. There are diminishing returns and Google's starting to feel the burn of a slip in click-through-rates on their primary product, AdWords. Today's news that the EU has cleared Google's planned acquisition of online advertising behemoth DoubleClick can only help things. This will broaden Google's reach a great deal and make it considerably harder for rival Microsoft to gain the traction they'd like to with their AdCenter product.

Today's approval completes the acquisition for Google. I'm guessing we'll see some afterglow from that announcement tomorrow and some continued growth from the brand to a perhaps more balanced $550 or so over the next three months. We'll see what happens at the Q1 2008 earnings release on April 17th. If they've cleaned house a bit more this quarter, we'll see some positive activity. If they've failed to wow again, we could be in for another market-adjusting slide.

I plan on adding another $5,000 to the pot in the next month or so. I think I'll play that set a bit more closely and try some much shorter term holdings. I'm learning a great deal about things like Dollar Cost Averaging and other fun things like that.

We'll see how this goes.