Happy Friday! I’ve spent much of my day today sorting out the next two weeks of my life…stay in Michigan, or head back to California?

Originally we had planned to stay here in Michigan until the very end of August, but home is calling, I have much to do for you here at Kung Fu Finance and it needs to be done in California, and the Kung Fu Kids start school in just 2 1/2 weeks!

Summer here in Michigan has been amazing, but it’s time to head home. So, after spending all morning on the phone with United and Delta (you can only imagine how that went — it must be time for a drink…) and crazy California summer camps, the Kung Fu Kids and I are heading home this Sunday (Kung Fu Guy is already there…yet another reason to go home!).

Now, I know you might think I’m crazy for calling California “home”, seeing as how it has the rather dubious distinction of being the most messed-up state in the Union right now with three large cities having declared bankruptcy already and many more on the precipice. The latest to fall was San Bernadino last week — it had a $46 million budget “shortfall” (and you thought you had budgeting troubles…) and it finally threw in the towel on August 2nd, joining Stockton and Mammoth Lakes in the latest wave of debt and balance sheet insanity.

Ah yes, home sweet home!

But there are some good things about California (honest…):

  1. Incredible diversity (people, food, drink, culture, language…)
  2. Stunning landscapes (ocean, mountains, desert, Big Sur, Yosemite, wine country, surf beaches, Lake Tahoe, more…)
  3. Focus on health
  4. Great people (ahem…)   🙂

And of course…thriving Silicon Valley, home of all things technology!

So in honor of my homecoming and return to technology central (I actually live down the street from Mark Zuckerberg — true story), I want to bring you the final installment of my interview with Alex Daley of Casey Research today. I hope you enjoy it!

(I will be back on Tuesday with more of my own thoughts on what it’s going to take to go all kung fu on your finances for the remainder of this year!)

Oh, and in case you are wondering about Hotel California…yes, I am listening to this right now while I write to you, and there are oh-so-many aspects of that song I could cover here today and relate to the current fiscal insanity, if only I had more time! I will have to write a full article on it one day. (“You can check out anytime you like, but you can never leave…” Time to get that second passport?)

Onto part two of my interview with Alex…


How do you determine as an individual investor what percentage of your portfolio to allocate to technology stocks?


I’m not a personal financial advisor, so I can’t tell you what’s right for everybody, but I can tell you how I look at my own personal portfolio.

I divide my portfolio of all of my investable assets across 10% slices.

Instead of taking 100% of someone’s 401(k) and throwing it into the stock market and diversifying it across materials, textiles, consumer packaged goods, resources, etc., I look at it as equities, real estate, and alternative investments.

Speculative technology companies fit into one potential 10% slice of your portfolio.

I think it is important to have some speculative stuff in your portfolio because instead of risking 100% of your assets for the historical stock market gain over the last 50 years of 6.6% or something in that range, before taxes (and we’ve seen in any given year you might lose 30 – 40%…1987, 2000, 2008 have proven out that stocks are highly volatile).

So instead of risking 100% of your assets for a 7% gain, I would rather take 10% of my assets and reasonably swing for a 100% gain, and if I happen to lose it all, I’ve lost far less than I would in any particular bad year in the stock market, maybe a third or a fourth of what I would have lost otherwise.

But, if my skills prove out, then I’m able to double that amount of my portfolio and I’ve beaten the stock market gains with far less risk.

I also try to look at those 10% slices as being non-correlated.

I try to invest in many things that are not going to follow the market…2008 proved to a lot of investors that we are heavily over-invested in ETF’s of stocks, and they all tend to “correlate to one”, to use the geeky mathematical term for “they all go down at the same time”.

So I take a slice of my portfolio and put it towards highly speculative stocks. I have some in resource stocks and I have some in technology stocks.

Then I have a slice of my portfolio dedicated to index funds and trend investing, a slice toward bonds, a slice toward real estate, a slice towards alternative income like peer-to-peer lending and hard money lending, and across the entire portfolio I think you will find a place for speculative stock investing.

However, I don’t think anybody should be taking 80 – 90% of their portfolio and throwing it into tech stocks.


Very good, thank you. What do you think about IPO’s?


The IPO is an interesting animal. It serves a very, very important space in the market, because it’s the one place where you can raise very large amounts of capital across very large numbers of investors.

When you’re dealing with a company like a Biotech company, the average drug takes about a billion dollars in investment to get to market. And it’s very hard to find five investors or ten investors or even 100 investors willing to pony up a billion dollars for a company to make it to market, but if you spread that risk across thousands of investors with small investments each, you can easily raise that kind of money over the course of a few years.

So the public markets and the IPO process are incredibly valuable for those kinds of companies.

However, not all IPO’s are created equal, and as bankers do, Wall St. has managed to turn a lot of what we call IPO’s into something entirely different, which I consider “Owner Enrichment Events”, and these events are very, very different.

If you look at an IPO like Facebook, we recommended to our investors to stay as far away from the IPO as possible. Not because of all of the valuation considerations and those things, although of course those were there in the background, but the primary reason was because the overwhelming majority of shares in the Facebook IPO were being sold by insiders. They were individual managers, directors, early investors, who were flipping their shares out in the public market in order to enrich themselves, but weren’t financing the growth of Facebook.

The company already generates billions of dollars a year in revenue, and nearly a billion dollars a year in profits in order to finance its own growth. It didn’t need investors’ money to keep growing, it only needed access to the public markets to enrich its owners, and so to me that spells disaster, where the interests of the company and the bankers are not aligned with the interests of stock market investors.

So that was destined to fail. And you’re seeing an increasingly large number of IPOs that are out there simply to enrich their owners.

So I recommend focusing first on IPO’s that are raising money for companies to grow – companies that have a smart business plan, a great management team, and whose interests are aligned with shareholders.

If you see 5% or even 10% of an IPO, especially for a small upstart, like a biotech company that’s not making any money, dedicated towards insiders, that’s usually actually a good thing, because you’ve generally had people working for 5 years or 7 years for sub-poverty level wages in the hopes that someday the company would go public and eventually start selling a very profitable product.

So to give a little bit to those scientists and managers who have been toiling away for very low wages to keep them incentivized and to keep them working is smart, and a good Board of Directors will manage that level of compensation effectively such that you reward people in the short-term, but you keep their long-term incentive aligned towards having the company grow profitable products.

When you’re simply cashing out all of the managers and investors and providing them with so much money that they are all going to quit, buy their yachts, and move to Singapore, a la Eduardo Saverin, then you’re definitely not aligning those interests.


Where as an investor can you find out what percentage goes to whom?


All that information is in the prospectus – the prospectus has to tell you where the source of the shares are coming from, so you can just crack open any IPO prospectus and you can see where they’re coming from, who’s selling how much, how much of the company they’ll retain afterwards, etc….it’s all in there.

The IPO process is also very complicated, though. I don’t recommend that most individual investors participate directly in IPO’s. There are all kinds of interesting things that happen during IPO’s.

A lot of them came to public light during the Facebook IPO, things like green shoe allocations, where the investment bank has an incentive, where if they can get a high enough price for the stock they can actually buy a bunch of stock from the company at a discounted price and immediately flip it onto the market for a very large profit, and companies generally exercise a good amount of caution in that space and use them effectively…but ultimately it’s a tool just to make the bankers richer and to stabilize the prices for existing owners.

It has its market purpose, but again in the case of the Facebook IPO, it was abused during that IPO, which was sort of an example of everything bad about IPO’s in America.

So instead of getting involved in IPO’s, I usually recommend to investors that they just wait even a day. If you’re really that excited, wait a day, if you’re not, wait a few weeks until after the company is trading and look to buy it then.

Oftentimes your patience is rewarded with a post-IPO dip, when the initial heyday wears off and a lot of investors will be willing to sell their shares for considerably less than it was going at the IPO, especially those insiders who were looking to make a little bit more money, and you can generally get that company a discount…it’s not always the case, sometimes the stock takes off and running, like LinkedIn did, but even then, you’re not missing much of LinkedIn’s growth if you waited two weeks post-IPO to buy.


Great advice. Do you have any other advice for a first-time technology stock investor?


I think ultimately, if you’re going to invest in this space, heed Warren Buffet’s advice and invest in what you understand.

That doesn’t necessarily have to mean that you are an expert in technology—Warren Buffet is famous for not having ever invested in any technology companies because he says he doesn’t understand technology, but you know what, when it came down to push come to shove he bought into IBM.

He bought into IBM because he understood their business model. The services business, and what they brought as a consultant to the government and large businesses was obvious to Buffet, and so he was willing to buy into a technology company.

What matters is that you understand the management team, that you understand the business model, and that you understand the technology reasonably well enough that you can make a judgment about its success on the market.

Too many people fall in love with the potential of a technology instead of its reality, so I would say focus on either doing the research yourself, or having a great advisor, be it a newsletter publisher or another independent researcher, who’s not a broker, who’s not a money manager, who’s not a Wall St. firm — someone independent to tell you whether or not it’s a good company, a good buy, and then do your own due diligence and follow up from there.

But definitely make sure you understand what you’re investing in well enough to make an informed decision about whether or not it’s a good investment—don’t take any one analyst’s word for gospel and certainly be careful knowing the incentives of the people you are taking advice from, because many of the people dishing out advice in this industry are working for the companies, or for the banks that represent the companies, and not for you.


Great advice, thank you Alex!


No problem, great to talk with you!


And speaking of one more cool thing in California, it’s the upcoming Casey Conference in beautiful Carlsbad, California, where you can meet Alex (and yours truly) in person and pick his brain on your own…he is a very nice guy, and very, very smart! I just learned tonight in the Casey Daily Dispatch that there are only 30 spaces remaining, so if you’re thinking of joining us don’t wait too long…

I am off to pack, and I hope you have a wonderful weekend! Please let me know what you think about tech stock investing and Alex’s asset allocation strategy and IPO advice in the comments — I’d love to hear your opinion!

To your financial success,

— Kung Fu Girl