Back in April of 2010, popular MMO blogger John Chow and myself got into a debate over where you should trade Apple (NYSE: AAPL) on the markets. This was the Monday following the initial release of the infamous Apple iPad, which reportedly sold a few hundred thousand units. I bet that the direction of Apple would actually be LOWER on Monday, despite a great headline number — John disagreed, citing a good response to the new product launch. The result? Apple traded higher on Monday, April 5th by 1.07%.

Why John Chow was the winner

As soon as the day closed, John and I got to talking:

Now, while the stock of Apple was up on the day, my verdict was that I was in fact the winner because they underperformed the market. Perhaps John and I come from two different schools of thought, but I really don’t care how awesome my stocks are doing if they are underperforming the market. On the day, Apple underperformed the technology benchmark slightly… so I took this as to say if there was zero news, Apple would have been up more. Why do I put more weight on relative performance versus nominal performance? Any investor can just dump their money in a large index fund and do fine… there is no point in owning Apple and trying to pick stocks if you are underperforming the broader basket of stocks.

Regardless, I read what I said… and because I didn’t mention relative performance I am writing this review as payment for a lost bet. As it happens, John was absolutely correct about Apple’s stock! Looking over the past few months, Apple has actually outperformed the S&P 500 Index by roughly 15% and has been one of the best performing companies in the markets. Was this due to strong iPad sales? That is too much for me to extrapolate — but the news now is that Apple valued higher than Microsoft!

Is Apple Overvalued Here? Was John Chow Just “Lucky?”

It remains my contention that John was the fortunate benefactor of random upward momentum in Apple’s stock. The reason that he expected the stock to trade up was that the iPad sold a lot of units. Despite how many units they sold (which was actually in-line with expectations), it is important to look at how the stock market actually works. Naturally, everyone and their grandmother knows that Apple is “sexy” and that people like their products. The problem here is that investors aren’t dumb — positive sentiment is already factored in.

Apple is a great growth company, but I absolutely hate putting cash to work in stocks that are positively viewed by the market. Why? Think about upside and downside. Assuming that market movements are relatively unpredictable, which I think most of us would agree to, stocks that are “good” will not move up on positive news (they are already assumed to be good) but will get slaughtered on bad news (nobody expects a company like Apple to issue a product recall). On the other hand, stocks that are frowned upon now will do awesome on any piece of good news, while bad news is largely ignored because the company is already seen as being of lower quality so they won’t do too bad.

Looking at the performance of Apple, it is common for stocks to trade up on the expectation and sell on the news — in fact, so popular it is an axiom. This is why Apple always gets killed the day after they release good earnings: they might have been good but everyone saw it coming. The market sees forward 6 months, so trying to profit off of news like the iPad is insane difficult. Did John Chow get lucky? I don’t think so — he knows a lot more about the tech space than me and probably has additional insight into Apple’s products. However, I would think that over the short term my track record would be better. John won this round.

A Smarter Investment Strategy That Makes Sense:
At the very least, I think that it is psychotic that Apple is valued higher than Microsoft… and would embark on a long-term “short Apple, long Microsoft” strategy for investing. This will capture any outperformance of Microsoft in a market-neutral way. My prediction is that growth in Apple will inevitably slow down, no matter how good you think they are. People are currently willing to pay more than 22 times the amount of Apple’s current earnings to own shares (what we call a “P/E ratio”), whereas Microsoft is getting less than 14 times. However, Microsoft generates cash like nobody’s business ($21B last year), and Apple isn’t even close to that good ($12B last year). Stock value is all about cash flow that the business is experiencing. Despite the fact that Apple might gain more cash flow per year over time, they would have to surpass Microsoft’s $21B number in around 6-7 years in order to end up more profitable into perpetuity. To this, I say “fat chance.” In fact, if both companies held their current cash generation rates, Microsoft is worth twice as much as Apple.

My Gift to John Chow

For John’s birthday, and for winning our little bet, I compiled a completely customized portfolio strategy report for him and sent him it in the mail, along with a copy of one of the best investing books out there — “One Up On Wall Street” by Peter Lynch, one of the greatest investors in history. I put some effort into developing this report, and it recommended a portfolio allocation to John based on two things: 1) his personal investment profile (as a technology lover); 2) the market conditions. I recommended weighting his stock portfolio in a certain manner that I feel will outperform the markets, and recommended stocks that I felt are underpriced and worth investing in. I don’t want to reveal the actual report, which was around 5 pages and professionally printed, but here is a screenshot:

The Proof Is In The Pudding

I issue an unofficial email newsletter to friends and family that want stock picks and pans when I see the opportunity. I run what I call “Jim’s Value-Growth Portfolio” privately through ThinkOrSwim.com (my broker). My portfolio to date is actually up a considerable amount — despite the fact that the market is down. I do not short stocks in it, so anyone can get invested and feel comfortable.

The last date I updated my performance was May 2th: My portfolio is up 9.31% and the S&P500 is down 2.64%, an outperformance of about 12%. Here is a chart of my investments versus the market:

To me, it’s all about timing the market and investing in the right industries when it is most prudent — this is why John Chow’s strategy of investing in companies that have a new product that he thinks is cool, is basically heresy to me. And hey, when John wrote “ Oh crap! That was wild market ride! I hoped you picked up some nice stock bargains! I did!” on May 6th, I recommended staying on the sidelines and the broad market is down over 6% since then.

Bottom Line: John Chow won this round of stock picking in the tech space, but I’d still give myself the edge on the broad market. At any rate, I figured this would be a chance to get a few good jabs in on the man. Congratulations John, you’ve proven your mettle in IT stocks.

-Jimvesting Dot Com

Recently I made an upgrade to the header on my blog, and it was a BIG update at that! Not only did I enhance the looks of the most-viewed area of my blog, but I added a newsletter opt-in box which could potentially boost my subscribers tremendously.

But was my excitement premature!?

One of my readers, Rob from myTTOOS.com, pointed out the following:

Rob: “Really cool, but i bet it will be overseen a lot = bad conversion. Let us know if i am right.”

Jim: “Could be true… but then again I am not trying to spam people like typical marketers, haha”

Rob: “at least put the focus on the chalk board, put a few blinking stars around it or something lol”

Though it sounded silly at first, I started thinking about just how right he was! While I was all concerned with making the new opt-in newsletter box look at good as possible… I made it flow TOO WELL! Therefore, I needed a little something to get people to notice it (though I won’t be putting blinking stars on my header anytime soon, haha). So what did I do? I added a big ol’ floating arrow! Read the rest of this entry »

We’ve got a special today, a sale of one of the websites I am part-owner of!

BullishBankers.com is an established and popular financial research community with a strong subscriber base and pull in the industry. Recently, we had ceased to operate the site as of May 2009… so there has been a period of about 6 months where there has been nothing done to the site. HOWEVER, we believe that despite the recent activity, it will be very easy to revitalize the website and should make for an attractive buying point for any interested buyer.

There are many reasons to consider the website, including (but not limited to):

• Fully customized website, based on WordPress, that has integrated features and custom coding for a financial audience
• vBulletin-based forum, including license, that is custom-skinned to match
• Twitter account (@bullishbankers) with almost 4,000 followers
• Average 37,500 uniques/month (during normal operations, July ’08-May ’09)
• Averaged $700/month, with a peak monthly earnings close to $1,200/month
• Quality partnerships, including theStreet.com, Seeking Alpha and Morningstar
• RSS feed with over 1,750 daily readers
• Aweber newsletter with almost 1,500 subscribers Read the rest of this entry »

Ladies and gentlemen, after much concern with where I have been for the past two months… we’re back in action with a new series of posts. I want to revitalize theNetFool.com now that I have rebooted from the close of a challenging semester and bring the blog back into the limelight. You know what that means! I’m going to need your help to spread the word that we are indeed back in action. I’m looking forward to the challenge .

With that in mind… I have a little “break in the action” planned for today!

I’ve long been a proponent of traditional pen-and-paper communication, but seeing as how technology has been evolving to the point where I can watch live television on my cellphone… the old school postal service (aka “snail mail”) just seems to be behind the times. Despite numerous attempts to improve one of the oldest American means of transportation, many companies have crashed and burned at the hands of traditionalists like myself. Just recently, however, I’ve discovered a fantastic service that I think can really be a game changer. Read the rest of this entry »

Welcome back to the second half of our two-part article tutorial on forming your own eBusiness. In part one, we talked about forming the idea, gathering up your resources and brainstorming for that winning company title. If you haven’t checked out the post already… I highly recommend that you go back and read up on the strategy portion of this lesson.

Now that we have our corporate strategy set up and organized, we need to talk about the real “nitty gritty” details of how exactly to form your business. Everybody talks about it, but it seems like something that is so difficult to do that many people don’t even try! Not the case. Starting a business on the internet, an eBusiness if you will, is one of the more simple processes out there. All we really need is some legal protection under an LLC or an S-Corporation to start off; then, we should set up some financial agreements to lock in our business security. Let’s get to it!

Limited Liability Corporations (LLC.) and S-Corporations (Inc.)

One of the most daunting tasks in operating an eBusiness online is choosing between the two types of corporate structure: Limited Liability Corporation (LLC.) or S-Corporation (Inc.). There are many similarities and differences between the two… but in the long run, the choice is really based on a business-specific case. In the terms of online businesses, you probably won’t want to try out anything but an LLC or an S-Corp for practical reasons… so let’s stick with the two.

There are many examples of both businesses on the internet, and the differences can sometimes be blurred. When you think about a Limited Liability Corporation or S-Corporation, both function as “pass-through” entities for your business. What this basically means is that any taxation for the business can be “passed-through” to their owner’s income statements for legal purposes. This avoids the problem of double-taxation that you would run into with anything else. For Bullish Bankers, we took the LLC. for flexibility and practicality, and became Bullish Bankers LLC. My friend Tyler Cruz (whom many of you know) chose to get an S-Corp for Merendi Networks because of savings on employment taxes among other things.

The Bottom Line Decision:
I recommend Limited Liability Corporations because they are a lot easier to operate. They do not have to be operated by a board of directors like an S-Corp, and also offer flexibility in profit-sharing and a more lax ownership structure. If you would prefer the rigid and set-in-stone rules that come along with massive employment… go with the S-Corp. If you would rather feel your way through it all with a more allowing structure… go with the LLC. You can read more details in this article if you need more information.

Registering Your Corporation

Now that you have selected between an LLC and an S-Corporation… it’s time to go ahead and actually register your business. How much will this cost? Actually, it is only around $100 to do it yourself. The price will vary by state, but in Maryland (where I registered both of my small businesses) it was just $100 for registration filing for life. Not a bad deal for thousands in potential tax savings, eh?

So here are the two routes:

• Hire a Professional: If you are just too lazy to dig around on your State Department website and do the filing yourself (which is ultra-simple), you can always hire someone and pay them fees to do it for you. Sure, this will run you around $200 (double) for the filing costs and the service charge… but it is also a lot easier. I’d recommend using LegalZoom.com to handle this. I have never used them myself, but have heard only positive remarks toward their service.
• Find the Forms and File: This is really very simple to do, and is just a one-form contract. The best way to do anything nowadays is to search through Google. So search for your “State filing an LLC.” or “State filing an S-Corp” and you should find the documents available no problem. Not a lot is required on these forms, just your name, business name, address and a check for the amount required. They will be called the “Articles of Organization” or “Articles of Incorporation”. For an example, see how easy the form for Maryland is!

Filing with the Internal Revenue Service (IRS)

To save some time, we are going to go ahead and file for an Employee Identification Number (EIN) from the IRS. The reasoning behind this is essentially the same reason why individuals carry Social Security Numbers. This is a number that you will need time and time again, so it is better to get it now and get it over with.

Getting an EIN from the IRS is one of the quickest and easiest steps you will make, despite how daunting it seems. It is completely free, and you can apply for an EIN online and get your EIN number almost instantly via email. Then, just print out the forms to have a physical copy or two. You’ll need the EIN if you sign on as an affiliate for any company or if you need to open a bank account, among other things.

Setting Up a Banking Account

Many banks nowadays emphasize small businesses. Because banks function off of deposits and loans… they actually do want your money. Check out your local banks or nationalized chains and ask them about their banking plans for small businesses. You are going to want a bank with checking… and if you are planning on running a lot of transactions you might want to pay a little extra for the flexibility. I use PNC Bank for my operations through both LLCs that I own.

Once you set up a bank, you will have something to link a PayPal account to if you choose to do this. As an online eBusiness, I trust PayPal to handle most of my transactions. Plus, since this is legally separate from your banking account, you will get as many free transactions as you want! This PayPal-Bank combination is pretty standard nowadays, and it is how a lot of us operate. At the very least, you need that bank account to have checking capabilities so you can pay the bills under your company name.

Protecting your Business with Legality

We’re almost done! We’ve got everything from the company registration (takes a month or two to clear) to a bank account to our Employee ID Number from the IRS. All we need at this point, is a few second checks against any potential liability issues that might arise. I would recommend getting together a Privacy Policy and a Terms of Service for every website that you administer under your eBusiness. We need a way to ensure that nothing goes wrong… and if something does, you are protected against it. Writing a Privacy Policy and Terms of Service can be a time-drawn process, but it is well worth it in the long run. You can take a look at the Privacy Policy and Terms of Service from Bullish Bankers LLC. if you need an example of how to correctly write one of these to cover your bases.

Second to the online forms to secure your liability downside, if you are working with partners you should draw up a charter. This is just a simple document that you can write yourself delegating tasks and the corporate structure. We’ll call this a Manager’s Agreement. One thing about the law that many don’t understand, is that you can effectively write anything yourself and have people sign it to be legally bound… so long as they are fully aware of what they are signing and consent to the terms. Get in Microsoft Word and write up a clause… perhaps delegating who is the CEO and who is the HR Representative… perhaps talking about ownership, who owns what % of the business… or even talking about your voting process. You should always draft something like this and have it signed early if you are running a corporation to have everything set before you hit the ground running.

Bottom Line:
Whew! That’s a lot of paperwork, eh? Hopefully, after reading through this two-parter… you realize that starting your own business really isn’t too much work when it all comes down to it. After all, once you get past the initial set up, your business will carry a considerable amount of added weight, and people will downright trust you more. An added bonus to all of this is that you no longer have full liability for loss because of your filing with the government. I’d say it’s a good idea overall.

Hope you enjoyed this lesson on forming your first eBusiness. Feel free to contact me with any questions, or just drop a comment. Oh, and stay bullish on the net!
-Jimvesting