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Most people who watched CNBC or have taken interest in investing has heard of Mad Money with Jim Cramer. While browsing CNBC, I saw an article on Mr. Cramer and it reminded me of this interview done by Jon Stewart from the Daily Show (which I am fan of). Many people love Jim Cramer and eat up his stock picks and stock ideas without really knowing more about him. I refer you to the following video. Please watch all 3 parts.

http://www.thedailyshow.com/watch/thu-march-12-2009/jim-cramer-pt--1

Jim Cramer is a very intelligent man. Graduated from Harvard and has his own TV show in addition to being a former hedge fund manager and chairman of TheStreet.com. So his intelligence is not in question.

While the show purports to give good investment advice. If you watch the show, often people call in and he solves their issues within 30 seconds. This may work occasionally, but more often than not I feel not enough detail is given or enough thought. Plus his stock picking..... seems a bit too sensational. Because of his fame, his ideas affect the markets in the short term. While I understand his show needs to attract viewers, there should be a line drawn somewhere to protect the individual. Keep in mind during both crashes, tech bubble and housing bubble, his picks have cost people their entire fortunes.... twice. I do not believe I need to say more, as the interview with Jon Stewart sums it up pretty nicely.

It is as good to watch as it is awkward for Jim Cramer.

P.S. Don't get me wrong, I love his show, it is entertaining, but I would be very careful of taking any of it as investment advice.

Lodestone Blog

Social media games and apps have become very popular over the last few years. Due to the generally cheap cost of producing an app, especially with a small team coding on their off hours after work, led to quite a few success stories. One of the biggest, Zynga (ZNGA) is well known for its large success with Farmville and Cityville. With earnings estimate of 6 cents per share and reported earnings of 1 cent a share, the disparity has caused it to be trading down 37% in after hours trading, from around $5 a share to $3.20 a share as of this writing.

With that said, we can look into the apps a bit more. Farmville started in 2009 and is exactly what it sounds like. You run a farm. I've played it for a bit and it consists of building a farm, rearranging chickens and planting and harvesting crops. I lost interest pretty quickly, but many of my friends (notably my female friends) were addicted to it and constantly checking the growth of their crops. It boggled my mind, but they seemed to love it. But it lacked 2 items necessary for the long term survivability of the game. There was no depth to the game and lack of community. No matter how cute the chicken and cows are, you can only plant strawberries so many times before enough is enough. From April 2011 to May 2011, active daily users dropped from 13.5 million to around 12 million. This may have been a continued result of the rise of Cityville which started in December of 2010, but the loss of users was inevitable.

Cityville was a much bigger success than Farmville. It reached upwards of 20+ million daily active users, but with the same issues and same situation, it has slowly deteriorated over time and is current sitting around 3.5 to 4 million daily active users.

With all the money in the bank and no other hit games, they began acquiring smaller startup firms with promising games. One notable purchase was Draw Something by OMGapp. Draw Something is a pictionary type game that you could play with friends online. It exploded onto the mobile gaming platform and grew quickly to over 15 million active daily users in just a month or two. When I first heard about it, it was fun, but after about a week or two I started losing interest. I tend to have a much shorter attention span than most people, so I would assume that people would play the game much longer. Once Draw Something reached 15 million users, it was bought out by Zynga for a pretty price tag of 200 million. Then immediately in the following month, it lost 5 million active users. This is attributed to the game itself. You earn coins by guessing the picture correctly, but the database of items to draw is limited and starts to repeat quite often unless you buy the app for 1.99. The issue is, people like free stuff. 1.99 isn't much, but people are attached to free. So you either, increase the amount of items to draw for free, thus lowering your income as less people will purchase the app, or leave the app at 1.99, but then losing all the players who are unwilling to pay for the additional drawing items. It is a fine balance that was missed.

Going back to their earnings report. You can see from their income statements that gross income has risen quite exceptionally and their gross profit is well in line with their total revenue growth with economies of scale. Once the game is created, the cost of adding additional servers/maintenance for their games is marginal compared to the additional amount of users they can support.

The issue is that their R&D (research and development) and SG&A (selling, general & admin) expenses have shot up out of proportion to their increase in revenues.

Looking at 201o to 2011, revenues roughly doubled, cost of revenues doubled resulting in double the gross profit. So far so good. Once you move down more, you see R&D and SG&A has more than doubled. So that all the profit is used up, leaving very little for shareholders. This results in very little earnings per share.

(click to enlarge)

(Information for this chart was taken from the Edgar/SEC database)

While Zynga has been great at attracting users, if they are able to keep and grow their user base even at a low growth rate, but optimize their R&D and SG&A, they could become quite a profitable company.

With that said, we have no intention of investing in Zynga as we have not done enough homework (just taking a quick look at a few income statement is nowhere near enough) and it does not seem to trade at a big enough discount, assuming we could value the stock fairly.

Lodestone Blog

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Should I convert my 401k/Traditional IRA into a Roth? When is it worthwhile? There is a very easy way to answer this question assuming you do not take into account the fact that many company sponsored 401k's are more limited in investment choice. If we just compare a Traditional IRA vs a Roth IRA, we have the same effect of pre tax vs after tax accounts to see which is better for you.

In 2010, the government allowed for the rollovers of Traditional IRAs to Roth IRAs and to split the tax payments into 2 payments payable in 2011 and 2012. This was done to generate tax revenues that the government needed. It was both good and bad. Good for us, in that longer term we gain more savings/investments, but in the shorter term, the government received more taxes, but loses out on future taxes.

Now that the time has passed for that special rule, it still may be worthwhile to convert your IRAs. It mainly boils down to a factor of, do you think your current tax rate or your future tax rate (when you will be taking money out of your retirement accounts) will be higher. Assuming a same rate of return, if your current tax bracket is 35% and your retirement tax bracket is 35% and during the entire holding time the return is 10%, both accounts will net the same net dollar return for you. Now if you think your current tax rate is higher than your future tax rate, a Traditional IRA may be better for you as the immediate tax reduction is more beneficial. If you think your future/retirement tax rate will be equal or higher, then a Roth IRA may be for you.

Here's a chart showing contributions with a 25% tax rate, 10% annual returns for 10 years.

(click to enlarge)

As you can see, the traditional seems to be the better choice until taxes are taken out and you end up at the same exact place. Please note, to take into account the taxes, we assume that you only have 5000 to put toward savings. If you go with the ROTH option, your taxable income will be higher so your contribution will be lower.

One item to keep in mind, is that a Roth IRA does not have required minimum distributions (RMDs). With traditional IRAs, you are required to take an RMD by the April 1st after you turn age 70 1/2. With Roth IRAs there is no restriction in your lifetime, but your heirs will have your RMDs. But that is a post for another time.