Wisdom of Crowds experiment started 7-9-07

I will be posting the portfolio soon, I am currently working on some spreadsheets and things. It is about 20 5 star rated stocks. First day was interesting, but it did NOT beat the S&P 500. While the accuracy in stock picking was 67% which I consider good, all the gains where negated by an 8% loss by Bolt Technology (BTJ). Of course this is a long term experiment which even after today I think will handily outperform the S&P 500.

Wisdom of crowds

I have been very busy with summer school midterms and other things. The Wisdom of Crowds experiment will start around July 3-5. Im am still dividing stocks into sectors and deciding how many of each to include.

A new project for me: "The Wisdom of Crowds"

I recently finished a book called "The Wisdom of Crowds" by James Surowiecki. To quickly sum it up: He argues that a diverse group of people, having their information aggregated (averaged), make better decisions or guesses than any single member of the group. Surowiecki argues against the constant "search for the expert" going on in our society today. Simply put, the crowd is smarter than any single member in it (even if there is a so called expert in the crowd).

While the book was a bit bland for my taste, it gave me an interesting idea for an experiment. The Motley Fool CAPS site is one of my favorite investing websites. The idea behind it is to let anyone, not just "pros" rate individual stocks. People can rate stocks either outperfom or underperform and also enter their reasoning for all to see. If their ourperform stock does better than the S&P 500, you gain the percentage difference. Every members rating is aggregated and the stock is rated on a 1 to 5 star scale. My experiment will test Mr. Surowiecki's theory, and my prediction is that he will be right. What I plan to do is to create a virtual portfolio comprising of only stocks rated 5 stars. This experiment will go on for six months initially, and I will post a link to the portfolio for all to track once I decide on the number of stocks that will be included. If the portfolio beats the S&P 500 index, then it is a success. I will try to include an equal number of stocks from each industry in the portfolio. It will be up in the next 48 hours. Stay tuned.

Looking for a no risk investment?

This is for everyone who is scared that the stock market is due for a correction and is looking for a safe place to put their money and earn some decent returns. I have just learned of an online savings offering 6% APY. I signed up for HSBC direct a few months ago when they were offering 6% APY for a few months. FNBO Direct is offering 6% APY guaranteed not to change until October. Four months at 6%, not bad. If you are worried about the legitimacy, no need to be. FNBO Direct is a subsidiary of First National Bank of Omaha, a bank that has been around for 150 years. They are FDIC insured. I am in the process of opening an account, and will post updates.

https://www.fnbodirect.com/

Real Estate update- My analysis and forecast for the future

5/31/07

According to the Census Bureau http://www.census.gov/const/newressales.pdf, the supply of new homes on the market dropped to 6.5 months after being over 8 in February and March. To put that in perspective, in 2005 the supply was never over 5 months worth. That means that in February and March of 2007 there were 60% more new homes on the market than at the highest point in 2005.

I think that the spring has brought buyers out once again, which is one reason for the jump in sales. The other factor seems to be builders are realizing they have to slash prices in order to sell their huge inventory of new homes still on the market. At this point it is better for them to accept low prices instead of letting having them sit in inventory or in some cases go into foreclosure.

This increase in new homes sold, is a sign that these inventories are finally being cleared out and are coming back to a reasonable level. I previously did not make the distinction between new homes and existing homes (used homes) which led me to be confused by the April sales figures. I was looking for any signs that the market may have bottomed and was given some false hope by the rise in sales. However, with prices tanking it is unlikely that we have hit the bottom. There is hope however, prices have come down far enough that buying is looking attractive again (especially for first time home buyers which were practically priced out of the home market in recent years) especially with great bargains to be had by dealing with suffering builders.

Sales of new homes surged by 27.8 percent in the South. Ont the other hand, sales fell in the Midwest by 4 percent, and making it the only region in the country which has seen sales drop. This is not surprising, as I live in the Midwest and see the tremendous amount of homes for sale. Prices here are not dropping as drastically as in the Florida and California markets, simply because they did not rise as high in the first place.

What I have noticed is that prices have flattened (if not lowered slightly) and houses are on the market for very long periods of time. People who have purchased in the last two years have seen no appreciation in most cases, and would have a hard time getting the money they spent back if they were to sell today. The time of the "flipper" is long past. My view is that real estate is looking like a good long term investment at this point. If I were in the market, I would make a deal with a struggling builder, and try to rent the house for whatever I could. I would be greatly surprised if the market did not start appreciating again in the next two years, with someone purchasing now having a decent return on investment if they sell in 5 years. This is simply my opinion of course.

Existing home sales are the more important barometer of the real estate market in my opinion, as they effect the typical consumer (homeowner) the most. On May 25, The National Association of Realtors reported that sales of existing homes dropped by 2.6 percent in April to a seasonally adjusted annual rate of 5.99 million units. That means that sales are at their lowest point nearly four years. This does not bode well for the market. There is a multitude of homes for sale, and all sellers are holding firm with their prices, not willing to believe that prices of real estate have actually come down after skyrocketing for the past few years. These people (and it is already happening) will have to start lowering prices to sell their homes, or especially to sell investment properties that they have mortgages on. And then we will finally see a bottom in this market. Hopefully this is happening as I write this, and the market will start to stabilize. This is unlikely, but I predict it will happen within the year.

The supply of existing homes for sale shot up to a record total of 4.2 million in April, an increase of 394,000 from the March supply. Analysts predicted that this big inventory surge would act to further depress prices.

The analyst consensus is that the market will see a slight recovery in 2008. This is in line with my view, at least for the Midwest. I am not as convinced about other markets, such as California, where speculation has run rampant for many years.

It seems as though the stock market is currently the only thing keeping the U.S. from going into a recession as GDP growth has nearly halted and the all important real estate market has not reached bottom yet. Former Fed Chairman Allan Greenspan puts the likelihood of a recession at 1 in 3. If the stock market receives a correction as many are predicting, what will there be left to invest in (short term)? Let's hope we don't have to find out.

New Home sales soar by record amount

EDITED ON 5/31/07 (previously did not distinguish new home sales from existing)

This is not a headline from the housing boom of a few years ago, it is from 2 days ago. Sales of new single family homes gained 16.2%, while economists were predicting a paltry 0.2% gain. That is the biggest one-month sales gain since April 1993 (a 16.4%). This is not necessarily positive news, in fact it is quite confusing. While sales increased at a record level, the median price of a new home sold last month fell a record 11.1% to $229,100 from the previous month.

I just passed my real estate licensing exam and have some family in real estate, so this was particularly interesting. I will attempt to figure out what this article means in terms of the current housing market slump in the coming days.


http://www.msnbc.msn.com/id/18842917/

http://www.miamiherald.com/163/story/117143.html

Nintendo (NTDOY.pk) update

Nintendo held a Media Summit in Seattle last week to showcase some of the games scheduled to debut this summer and beyond (link to IGN coverage). To kick off the event, there was a presentation to the media by Nintendo of America president Reggie Fils-Aime. He discussed Nintendo's expanded audience games (games targeted outside of the normal gamer market) as well as the releases of Metroid Prime 3, Super Mario Galaxy, Smash Bros. Brawl and The Legend of Zelda: Phantom Hourglass later this year.

Here is a quote from his speech that particularly stood out for me:

"In the history of the videogame industry here in the United States, only one company has ever been the number-one manufacturer of a hardware console, the number-one manufacturer of a portable console, the number-one game publisher and the owner of America's top-selling game all at the same time. The company was Nintendo back in the 80s. And now today we've done it all over again."

I overlooked this fact in my earlier analysis and it further goes to show Nintendo's dominance in the gaming market at this time. This bodes well for Nintendo's stock price in the short term.

A few other points of interest:

Nintendo Wii is number 3 in a Top Products of 2007 story by PC World. (link here) Where does the XBox 360 rank? The upgraded Xbox 360 Elite places number 18 on the list, while Sony's PS3 is nowhere to be found.

Lastly, Nintendo's stock went up 2% recently on news that their target for Wii sales in the U.S. by 2012 is 35 million. That is very close to the 38.2 million Ps2 consoles sold in the U.S. thus far. The Ps2 is the biggest selling console of all time.