Walk Barefoot (The Financial Athlete #135)

“Walk barefoot,” advised my Balinese healer, who I had visited for back pain relief. His English girlfriend was translating Indonesian into English. “Gently press your toes into the earth with each step. Your toes are like the prongs of a power cord that plug into an electrical socket. Be sure to plug the full length of your toes into the earth.”

In circles I walked barefoot, bringing consciousness into my toes.

“How does it feel?”

I did not have to stop to reflect upon the sensation. “I feel more integrated with the earth.”

“Good. Now stand still. Relax. Again, gently press your toes into the earth.”

“How does it feel?” he asked again.

“I feel a more solid foundation.”

He nodded his head, “The whole body is integrated. Proper body alignment begins with the foundation of the body — the feet — which will help support the spine.”

Since this consultation, I walk barefoot more often. My once delicate feet now tread over rocks and pebbles on the beach with ease. I no longer have to bring consciousness into the action of my toes. The process has been naturally integrated in the movement pattern of walking barefoot. Integrating proper movement patterns allows healing.

In the same vein, the principles of sound investing must be integrated into the practice of investing. It is not enough to hear them or even to understand them. The process of integration begins with bringing awareness into the principles, one at a time. Meditate on a principle. Allow it to become instilled in the mind. From here, you will automatically apply the principle into the movement pattern of investing.

Energy Flow (The Financial Athlete #134)

An old woman sat squatted before the village gate. A traveler stopped to speak to her, “I am weary from a very long journey. Tell me what are the people like in your village.”

The old woman replied, “Tell me first where you are from and what the people are like from your village?”

“I am from Bukah. The people there are rude and selfish. They lie, cheat, argue, push and shove. It is a very unfriendly place.”

“Well then, you should not enter my village,” said the old woman. “Here the people are rude and selfish, too. They lie and cheat and argue constantly about nothing of importance. They are especially mean to strangers. I sit here alone breathing the dust because they pushed and shoved my frail and old body outside the gate.”

Stunned, the traveler said, “Then this is no place for me! Although I am weary I will continue on in my journey.” And he left without setting foot past the village gate.

Only a few hours later, another traveler stopped to speak to the old woman. “Excuse me. I have traveled a very long journey from my village called Bukah. What are the people like in this village?”

The old woman rubbed the palms of her hands and replied, “First tell me what the people of Bukah are like?”

“The people of Bukah are kind and loving. They are honest and trustworthy and encourage one another. It is a very friendly place. I miss it already.”

The old woman smiled. “Well then, you will love my village. Here, too, the people are kind, loving, honest, and trustworthy.” Now she stood up and hugged the traveler to welcome him just before he happily entered the village gate.

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Consciously or unconsciously, you bring energy into every activity. If a competitive athlete in an individual sport is overwhelmed with negative energy, chances are high she will lose the game. Likewise, if an investor is overwhelmed with negative energy, chances are high he will lose on the investment. This simply manifests the Law of Attraction.

Stop and feel the energy within you. Is it negative or positive? Negative energy consists of greed, or anxiety, or cynicism, or anger, or any combination thereof. Positive energy consists of joy, or stillness of mind, or patience, or openness, or any combination thereof.

Beware of excess positive energy. An excess of joy turns into irrational, over exuberance. An excess of openness turns into not thinking for yourself. Under either form of excess, losses are likely to result.

Always bring awareness to the energy you carry within before investing. If the energy is negative, do not invest no matter how sensible the opportunity seems. Positive energy must be in balance and aligned with rational thinking. Only then are you are truly ready to invest.

* The above story I heard in Bali, Indonesia. As usual, I have added my own embellishments, including calling the town “Bukah”, which means open in Indonesian.

Process Oriented vs. Goal Oriented (The Financial Athlete #133)

Teaching tennis during the summer to two beginner level girls was fun. The girls learned how to volley with control, ground stroke with top spin, serve without a push, and basic game strategy for doubles…enough to do fine for high school tennis. I was proud of their work ethic, progress, and above all, their love for the game.

I watched them play their last match. They were given no time to warm-up, but neither were their opponents. The top of the net obstructed most of balls the girls hit with top spin. Their volleys were rushed and forceful. They tried for too many winning point shots, while their opponents kept the ball in play. (To keep the ball in play is a strategy to win by allowing your opponents to beat themselves with unforced errors.) Unnerved with falling behind in score, the girls I had trained reverted to old and ineffective habits such as hitting most ground strokes with flat strokes. Their confidence waned, sinking into a sea of disappointment. Abandoning the process based on skills, they inadvertently abandoned playing in a balanced state of mind.

The root problem lied in that they were too goal oriented, not process oriented. The increasingly elusive goal of victory reflected in their sluggish body language, as though their bodies were slowly melting into the earth. Ironically, had they focused on the process of playing skillfully rather than on winning, they may have come back from far behind to win the match.

To be fair, being process oriented is not an easy feat when things go against your favor. Being process oriented is a skill that takes conscious effort to cultivate. First, you must trust the effective process. In trusting the process, your mind and muscles are not bound by unnecessary tension. Your mind remains in relaxed state, regardless of the circumstances. Secondly, you must have the discipline to stick with the process. Knowing the process but abandoning it is as useless as not knowing it at all.

Do not confuse being process oriented with being intransigent. Being process oriented allows for adjustments. It includes contingency plans and is continuously refined. If you are process oriented, you are fully present to make the proper adjustments.

An investor should stick to the process of adhering to sound investing principles with at least 90% of his wealth. The remaining 10%, call it “play money”, can be used on an “experimental basis”.

Magnitude of Risk (The Financial Athlete #132)

Playing a high impact sport with an injury risks worsening it to a chronic one. Caught in the heat of the moment during an exciting game, it can be difficult for the athlete to consider the magnitude of this risk. Likewise, the investor must consider the magnitude of risk.

Take, for example, the following simple scenario.

Initial investment: $1000
60% probability of 3 x return = $1,800
10% probability of 10% loss = ($10)
30% probability of 100% loss = ($300)

Expected outcome: $1,490

This investment may be tempting. Who doesn’t want to make an investment with a expected return of 49%. Now let’s suppose someone were to invest 80% of their net worth on this one “promising investment” and the outcome turned out to be the worst case scenario of 100% loss. The loss could be devastating, especially if the investor were nearing retirement age. Hence, the magnitude of risk for this investment is too high if overweight on it.

Always pair up an analysis of probability with magnitude of risk to determine how much should be invested. Too many investors fail to consider the magnitude of risk. This dumbs down the process of investing.

“Things should be made as simple as possible, but not simpler.”
– Albert Einstein

Afraid of the Ball? (The Financial Athlete #94, rewrite)

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When my dad was a kid, he got a broken nose from playing baseball. When my uncle was a kid, he also got a broken nose from playing baseball. When I was a kid, I didn’t want a broken nose so I didn’t play baseball. I was afraid of that hardball thrown lightening fast at my face. No one ever told me every kid new to the game feels the same way; and that as your skills develop, you lose your fear of the ball. If they told me, I wasn’t listening.

On the playing field, one of the first things you learn is you need courage to play well. With investing and life itself, you need courage to succeed, too. To gain anything of value comes with risk. Be bold but not reckless.

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As a bee seeks nectar from all kinds of
flowers, seek teachings everywhere

Like a deer that finds a quiet place to
graze, seek seclusion to digest all that
you have gathered.

Like a mad one beyond all limits, go
where you please and live like a lion
completely free of all fear.

– Dzogchen Tantra

Lifting too much weight (The Financial Athlete #52, rewrite)

A builder visits the Nordic gods. He promises, “I will build an impenetrable fortress. No mountain giants or frost giants could force their way in. For payment, I require the beautiful goddess Freyia as my wife, and the sun, and the moon.”

The gods laugh at how much he requires. Rather than deny the offer, they make it very difficult for the builder to gain his outrageous fee. The gods reply, ” We accept, on condition you complete the work within one winter without the help of man.”

The builder nods his head. “I agree, if you allow my stallion to help.”

The gods hesitate, but the god Loki urges them to grant this wish. An agreement is sealed with solemn oaths.

During the nights the stallion hauls stones, and during the days the builder constructs the fortress. Near the end of winter, it seems the work will be completed on time.

The gods say to Loki, “We are stupid to listen to your advise to enter this deal. We will lose not only Freyia, but also the sun and the moon. Fire will be our only source of light. You are crafty god. Find a way to stop the builder from completing his work on schedule!”

Loki transforms himself into a mare. In the early evening the mare lures the stallion into the forest, where they spend the entire night. The next morning the builder is infuriated, realizing he cannot do any work. In his rage, the gods realize he is really a mountain man disguised as a man. The gods summon Thor to kill him. Thor cracks open the skull of the mountain man with his hammer.

This story comes from Snorri Sturluson’s (1179-241) prose called Edda. Its lesson is if want too much, too soon, we are bound to get hammered. Those with too much leverage (debt) get hammered when the overpowering market forces turn against them. This begs the question: how much debt is appropriate? This can be learned by observing progressive weight training. Think of debt as a form of weight.

Who walks into a weight room to lift three times his body weight without ever having weight lifted in his life? Even the inexperienced are aware of the danger of lifting too much weight. Unlike heavy weight measured in kilos, the gravitational pull of the weight of debt is not as feared. This kind of weight won’t hurt your back or cause sore muscles for the rest of the day. There are no immediate repercussions with debt. This may be one reason many don’t hesitate to try to lift three times the weight of debt they can bear.

Piling up debt to consume goods and services or speculate on investments with an insurmountable amount is a sure sign of addiction to debt. Every addiction gives a certain high. The high for an addiction to debt is living a richer lifestyle or feeling like you will once your “investment” pays off. But all addictions debilitate. Too much debt eventually leads to a lower standard of living, not higher. While I don’t practice a policy of zero debt, it may be a good idea for someone addicted to debt.

For the rest of us, how should debt be managed? Take a cue from weightlifting, which teaches us to build strength before lifting heavier weight. A weightlifter works out on the same muscles 3-4 times a week and increases weight incrementally over time. So the point is not minimize debt but to only take on a level of debt your income can sustain. The greater your income, the more debt can be leveraged to further increase your income. Recall the question: “Which is the cart and which is the horse?” In this case, income always should be the horse, and debt the cart. A costly mistake is thinking vice versa.

This principle applies not only to personal finance but also to investments. If a company or real estate property has too heavy a debt burden relative to its cash flow, take a pass on that investment opportunity.

Patty Cake Tennis, Anyone? (The Financial Athlete #131)

How to play Patty Cake Tennis: Hit the ball to keep it in play. The objective is to maximize hits back and forth without the ball being obstructed by the net or landing outside the boundary lines or double bouncing. Dads like to play this game with the kids. It is sure to come with loads of frolic and giggles small kids learn how to hit on the center of strings — “the sweet spot”.

Caution: Patty cake tennis can be detrimental to your kids’ game once they can consistently hit on the center of strings. The ball is hit too safely with a flat stroke toward the center of court to minimize errors. In competitive tennis, these strokes are easy feeds for aggressive returns and pinpointed placement returns. Therefore, hitting the ball back and forth 500 times without errors ill prepares you against anyone with decent racket skills. Even worse, patty cake tennis encourages the behavior to, above all, avoid mistakes. Without mistakes obtaining mastery is an illusory hope. One can only improve by making mistakes.

Be willing to make mistakes. Learn from them, your own and the mistakes of others, to achieve mastery. Fearing mistakes stifles progress. The greatest of all mistakes is the fear of making one.

A full life is not made of all ups and no downs
It is experienced in cycles of ups and downs

A full life is lived with an open heart and open mind

A rich man cannot afford a full life
A poor man cannot offer it for sell

A full life is lived free of the weight of fear
free of the weight of contempt
and free of the weight of time

Principles of Joseph Pilates (The Financial Athlete #130)

Joseph Pilates (1880-1967) founded the Pilates method of exercise. Ironically, many “Pilates” exercises performed today were not actually practiced by Joe Pilates. These exercises fall under the evolved Pilates repertoire of exercises because they abide by Joe’s 6 Principles of Control, Concentration, Precision, Centering, Breathing, and Flow of Movement. Furthermore, these exercises are in harmony with principles of biomechanics and kinesiology, fields of study not widely developed during Joe Pilates lifetime.

5 of Joe Pilates 6 Principles will sharpen your investing skills.

Control

The music blasts to a hardcore aerobics plus weight lifting class. A barbell hangs on the shoulders for squats and shifts overhead for tricep extensions then to the front of the torso for bicep curls and rows. This hurried superset quickly gets the heart pumping faster with an adrenalin rush. All the while, the body rocks and rolls to the beat of the music. “Weightlifting in a gym or at home is too boring. This is the only way I can get motivated to work out with weights,” says an enthusiast participant. So what’s the problem with this form of exercise? Lack of control. Lost in the up tempo music, a participant drops down into a squat too quickly and bounces and/or twists out of the bottom position. This squeezes and twists the knee cartilage (menisci), which eventually causes damage. For good form, always maintain control. It is too easy to lose control with flighty exercises.

The Pilates solution for control begins with a conscious rhythm of the breath and carries on with a conscious movement of the core muscles coordinated with the breath.

As for investing, do no more than rush into an investment to lose control. Investors maintain control by thinking through a prospective investment with an open and skeptical mind. A simple tool to enforce self-control is to list objectively its Pro’s and Con’s. Weigh greater importance for the first items listed to evaluate, such as Expected Return of Investment for real estate. If the Con’s outweigh the Pro’s for the most essential aspects of an investment, pass on the investment opportunity. Do not waste time with deeper analysis.

For more on control, see “Play within your Level of Competence” #4

Concentration

To concentrate in Pilates is to unite the body and mind in the exercise. This approaches exercise holistically, as opposed to being too narrowly focused on one component of the body.

A common mistake for an investor of stocks is to become too narrowly focused on growth prospects or the Balance Sheet. This causes one-sidedness in perception. Recall the analogy of one blind man who only touches the trunk of an elephant, while another blind man only touches the elephant’s tail and yet another only touches the elephant’s ear. All three blind men wrongly perceive the true nature of the elephant and each in a completely different manner. For a holistic perception, concentrate on the all views: top, side, front, rear, and below.

For more on concentration, see “The Bird Dog beholds a Secret to Success” #73 and “Beyond the Bottom Line” #126 and “Triathlon” #115

Precision

Pay attention to details without losing sight of the big picture. Small details such as found in the fine print are very revealing. An eye for details requires constant study. Train your mind for this and it will manifest naturally.

For more on precision, see “Look Deeply” #131 and “Quality before Quantity” #88

Centering

By centering the movement initiates from the core…inward to outward.

How we invest manifests what is inside us. Cultivate perseverance and discipline from the core to accomplish incredible long-term results.

For more on centering, see “Move from the center” #95 and “Inner Core Strength” #117

Flowing Movement

Movement is never stiff or jerky or rushed. It flows like a gentle stream.

Investors should maintain liquidity for flowing movement. During recessions, the investors who benefit the most have the liquidity to buy discounted assets.

For more on flowing movement, see “Creating Space” #25 and “The Yin and Yang of Pitching” #22 and Beyond the Bottom Line #126
and “Be like Water” #7

“Think with your whole body.”
– Taisen Deshimaru

The comfort trap (The Financial Athlete #129)

“Otis” managed the apartment complex I was living in during my college years. Really, he didn’t manage the place; he mostly just collected the rent. All the tenants knew to contact the landlord if something had to be fixed right away or risk waiting forever for Otis to handle the problem. Otis wasn’t busy doing other work. He was just lazy.

One day the landlord was draining the pool and I approached him. Otis came up on in the conversation. The landlord explained, “It may surprise you to hear that for years Otis was a hard worker. He wisely set aside money to make a down payment on a house every 4 or 5 years. Now at age 40 he already owns and rents 5 houses and is satisfied with this rental income. Since he met his financial goal, he’s turned slothful. I need to find a better manager.”

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A rookie can become a multimillionaire before he plays his first professional game in the NBA, NFL, or MLB. Because he played so marvelously in college, the professional team is willing to pay big to put him on the roster for several years. Otherwise, another team would outbid them. This rookie then upsets high expectations with mediocre or poor performance in the professional league. After receiving that hefty initial check, his hard work ethic is no where to be found. He has settled into a “comfort trap”. Money, not love of game, was his real motivator. He only feels obligated to show up for games and practice, even if shamed by the media.

Athletes who shined in a college sport and later cave into mediocrity on the professional level should not be singled out. In almost every work environment, a good percentage just show up for the paycheck, doing what’s minimally required or less if they can get away with it. (Government bureaucracies are especially criticized for rewarding non-productive workers because they fire employees on the basis of seniority not performance.) Others, afraid of change, are productive but settle for years of routine in work they don’t enjoy. They too are confined by the comfort trap.

Do not invest in companies whose CEO’s are content with the status quo. Seek to invest in companies with CEO’s who exhibit a strong desire to revolutionize the industry and have the means to do so.

Do not allow the fire of ambition within you to extinguish. If you do, you will stagnate into a comfort trap. Reach higher and wider. To reach higher is doing more of the same successful action, such as buying more real estate with an eye on value. To reach wider is to try something new, broadening your experience such as returning to college for another study, or world traveling, or reading masterful works of fiction, or volunteering to help the community. All of these experiences enrich us. By refusing to stagnate into the comfort trap, you are always becoming.

After crossing the finish line, ready yourself for the next starting block.

It’s the training, stupid! (The Financial Athlete #128)

A kung fu practitioner said to me, “For me it was all about advancing in the ranks as quickly as possible. I don’t care about that anymore. All that matters now is the training. Since I stopped concerning myself with advancing in rank, I enjoy my training a lot more, and find myself training longer and harder. The rewards will take care themselves.”

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“The greater the risk, the greater the reward.” This is a common expression espoused by naive investors. I am guilty for once believing this Wall Street myth. The first question to cross my mind with a prospective  investment in a stock was “What is the upside?” Now, the first question to pop into my mind is “Does the company have a sustainable competitive advantage?”

After a certain point, it would be more accurate to say, “The greater the risk, the greater the stupidity.” You don’t have to be stupid to make stupid investments. Smart people also suffer from what I call “the tyranny of stupidity” with investing. Consequently, they lose big. Why? Smart people are more likely to be overconfident, which overrides managing risks properly. Seasoned investors know that the “bones” to investing is risk management.  As the framework of a body is held together by bones, so all investments should be held together by diligently managing risk.

Do not infer from this that managing risk is synonymous with no risk. To live life without taking any risks is hardly living. Managing risk protects you from severe losses (“taking a bath”). The first step to managing risk is to not be so concerned with the returns, especially short and medium term returns. This will also set you free to enjoy the process of sound investing.

“Risk comes from not knowing what you’re doing.” — Warren Buffett