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Why is a value investor writing about an unprofitable internet company? Because value investing is about finding dollars that trade for fifty cents; with a market cap of less than 75% of sales, Overstock.com (OSTK) looks like it may be exactly that.

But isn’t it too risky?

The greatest risk in any investment is the risk of overpaying. So, the real question is: what is Overstock worth? I think it’s worth at least $1.5 billion. With Overstock’s market cap currently sitting around $500 million, my valuation certainly looks far fetched. But, there’s only one way to know for sure. Let’s take apart my argument piece by piece, and see if any of my assumptions are unreasonable.

First Assumption: Over the next five years, Overstock will neither generate truly free cash flow nor consume cash. In other words, its free cash flow margin will average 0%. Cash generation in some years will exactly offset cash consumption in other years. Obviously, this assumption is unreasonable, because there is almost no chance the cash flows will exactly offset.

That’s not a problem if it turns out Overstock does generate some free cash flow over the next five years. In that case, my assumption simply errs on the side of caution. If, however, it turns out Overstock actually consumes cash over the next five years, there is a problem – possibly a very big problem. So, which scenario is more likely?

Overstock’s revenues are growing quickly. Gross margins look solid at 13.3% in 2004 and 14.9% over the last twelve months. Overstock’s unprofitability is the result of its selling, general, and administrative expenses (SG&A) which have been growing exponentially. Will these expenses continue to grow? Yes, but not as fast as revenues. Over the last twelve months, Overstock’s spending on cap ex has been 5.6% of sales. That number is an aberration. In the long run, spending on cap ex should not exceed 3% of sales. Considering the business Overstock is in and the expected sales growth, the company will, more likely than not, generate some free cash flow over the next five years. Therefore, the assumption that Overstock will be cash flow neutral over the next five years is not overly optimistic.

Second Assumption: Over the next five years, Overstock’s sales will grow by 15% annually. Is this an unreasonable assumption? Again, I don’t think it is. Very few industries are expected to grow as fast as eCommerce. Overstock’s revenue growth in 2003 and 2004 was over 100%. In the past year, that growth has slowed. However, it is still closer to 50% than it is to 15%. Overstock isn’t in a cyclical business. So, there is no reason to believe current sales are abnormally high.

Also, all that spending on advertising is increasing consumers’ awareness of Overstock. A review of Overstock’s traffic data shows it has not only been gaining more visitors; it has also been climbing the ranks of the most popular web sites. While it is a long, long way from the Amazons, Yahoos, and eBays of the world (and will never reach those heights) Overstock is becoming a well known internet destination. This fact was most clearly evident in the weeks leading up to Christmas. Shoppers who visited Overstock during the holiday season obviously know it exists, and may very well return at some other point in the year. Analysts are predicting very high growth rates for Overstock; however, they are also recommending you sell the stock. I don’t put any weight in their estimates. But, for the other reasons given, I believe the assumption that Overstock will grow sales at 15% a year for the next five years is not unreasonable.

Third Assumption: Six to ten years from today, Overstock will have a free cash flow margin of 3%. Ten years from today, Overstock’s free cash flow margin will rise to 4% and remain at that level. Now, of all the assumptions I’ve made, this one is the most questionable. Sure, Amazon has that kind of free cash flow margin, but Overstock isn’t Amazon, and it never will be Amazon. Overstock’s gross margins are less than Amazon’s. In fact, Overstock’s gross margins are less than Wal – Mart’s. However, Overstock’s fixed costs will eat up a much smaller portion of its sales than is the case over at Wal – Mart.

If you compare Overstock to other online retailers, you will see that if Overstock does experience strong sales growth, a 3% free cash flow margin six years from now is not unreasonable. I assumed Overstock’s sustainable free cash flow margin will be 4%. There’s a case to be made that 4% is too high. I won’t make that case, because I don’t believe in it. Remember, that 4% number comes ten years out. That gives Overstock plenty of time to grow sales and thus reduce SG&A as a percentage of sales.

Fourth Assumption: Six to ten years from today, Overstock will be growing sales by 12% a year; eleven to fifteen years from today, Overstock will be growing sales by 8% a year; thereafter, Overstock will grow sales by 4% a year. Let’s see what this really means. According to these assumptions, Overstock’s sales will be as follows:

Today: $707 million

2011: $1.59 billion

2016: $2.71 billion

2021: $3.83 billion

2026: $4.66 billion

2031: $5.67 billion

2036: $6.90 billion
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Forex trading systems are all about getting investments into the foreign markets. Foreign exchange markets are abbreviated to be called Forex. The worldwide trading of stocks in companies and in products happen over the Forex trading system. There are over a trillion dollars traded on the Forex market everyday. You can learn to chart and follow markets in the Forex trade world on your own, or you can rely on a broker as you would in the New York stock exchange. The Forex trading systems are similar in method, but each is a proven method of how to make money, how to learn about companies and how to follow what is going on with the money you are investing in the Forex trading markets.

You can live anywhere in the world and trade stocks and investments in the companies that are involved in the Forex markets. There are no limitations to the money you can make, or the money you can lose. The Forex markets can be tapped into online, over the phone or by contacting a broker in person. If you are interested in making money, you can do it on the Forex market, without having to have employees, or a broker to do this. You can get involved in learning about the investments in the Forex markets, and take on the responsibility for your own money, and making your own money. Many are starting their own businesses using their education and experience on the Forex market to make money.

The Forex market is one that is world wide, so there is sure to be something of interest to just about anyone that wants to expand their investments and expand their learning about money in the world wide markets. There are many experts in the Forex markets, and using the Forex trading system that you feel most comfortable with, you can be a Forex market expert as well.
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If you have heard fund managers talk about the way they invest, you know a great many employ a top down approach. First, they decide how much of their portfolio to allocate to stocks and how much to allocate to bonds. At this point, they may also decide upon the relative mix of foreign and domestic securities. Next, they decide upon the industries to invest in. It is not until all these decisions have been made that they actually get down to analyzing any particular securities. If you think logically about this approach for but a moment, you will recognize how truly foolish it is.

A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.

Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.

All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; it’s false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; he’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher’s handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitcher’s handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn’t determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you needn’t determine whether “the market” is undervalued or overvalued; you need only determine that a particular stock is undervalued. If you’re convinced it is, buy it – the market be damned!
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People always say that investment is a money game with the playing rule of “high risk with high return and low risk with low risk”. You may want to invest in an investment portfolio that is able to give a good return and stock market is always the best choice in term of high return. But you aware that investment in the stock market will cause you to lose all your money as well, because the game rule said “high risk is high return and low risk comes with low return”. Hence, stock game might not suit your risk profile; you may want to look for an alternative that can give comparatively good reward but with much lower risk than stock. If you are categorized in this group, then mutual fund can be your game.

Mutual Fund Is A Risk Sharing Game

A mutual fund is simply a financial medium that allow a group of investors to pool their money together with a predetermined investment objective. The pooled money will manage by a fund manager. The fund manager is a person who is widely expert in stock and bond markets. He/she is responsible to invest the pooled money into specific securities, usually stocks and bonds. When you are buying shares of mutual fund, you will become one of the fund’s shareholders. All the gains and losses will be shared among the fund’s shareholders. Hence, mutual fund is a risk sharing game.

Compare to stocks and bonds, mutual funds are one of the cost effective and an easy playing game. You do not need to really expert in stock and bond market because the fund manager will take care of it; and you do not need to crack your head to figure out which stocks or bonds to buy, because you have the expert, the fund manager to make the decision for you.

You do not need a lot of money to get your start the game; you decide the amount of money you plan to invest into the mutual fund. Some mutual funds may even let you start with just $100. The best part is the cost effectiveness. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading cost. The biggest advantage of mutual funds as compare to stocks or bonds is “diversification”.

Diversification Will Lower The Risk

Investment experts always advise that if you want to invest you money, “Don’t put all your eggs into the same basket; else if the basket fall, all you eggs will break”, some will happen on your money, if you invest in one stock, if the stock perform negative, you loss all you money. Diversify your investment to spread out your money into many different types of investments. When one investment is down, another might perform in up trend.
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