The comfort trap (The Financial Athlete #129)

June 22, 2009 by pastamanvibration

“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 stagnate into a comfort trap, however tempting it may be. 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)

June 11, 2009 by pastamanvibration

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.

Wear a helmet (The Financial Athlete #127)

May 23, 2009 by pastamanvibration

A road biker does not put on a helmet because he is overwhelmed by fear of reckless drivers or poor road conditions to cause him to crash. He puts on a helmet as part of procedure to prepare himself for the ride. Protection by wearing a helmet is an automatic action; and it does interfere with the ride.

An Investor should know how to protect himself. Like a helmet, protection should be an automatic response and not interfere with the process of investing. An Investor needs protection from unforeseen circumstances, financial predators, and perhaps above all, himself.

1. Unforeseen Circumstances

Health care insurance, life insurance, homeowners insurance, and rental property insurance…don’t do without these (if applicable). These protect the financial well being of you and your family. The worst of all possible scenarios can happen, and insurance guarantees your wealth is protected from a potential huge liability or severe illness.

Always rent a house with rental property insurance. Better yet, add on an umbrella policy to cover additional potential liability. Never think of insurance as a cost for “false fear”. Think of it as the cost of doing business.

As for stocks, the best “insurance” is to buy at a reasonable value the shares of companies with sustainable competitive advantages. Another form of “insurance” comes in the form of diversification. However, the financial industry over-prescribes diversification into stocks. When you are over-diversified, you own too many bad stocks. The financially literate with the time and interest to do due diligence should only invest into 10-20 strong companies in various industries and diversify into other asset classes for multiple streams of passive income.

2. Financial Predators

Don’t count on the government or police to rescue you from financial predators. The best protection against financial predators is financial literacy and to be less trusting of others in handling your money or who want your money “for an investment”. Financial predators are very skilled at trying to win over your trust. They may be your church members or community volunteers, anything to get you to drop your guard.

Always be in tune to “read people”. This is not being judgmental, it is sensing what is closer to reality (no one can comprehend full reality). Grasp verbal and non-verbal language. Verbal is more than the content of the spoken word. Often, how words are spoken communicates a truer message.

3. Protection from yourself

It is possible to make a quick fortune on one investment. We have all heard of how someone who put virtually all life savings in one investment and it paid off dearly. This story inspires greed. Rarely are results so fortuitous for others. It is more common for the results to be financially disastrous. Even if you were to win it big, chances are you will take another big gamble to try to repeat the experience but end up losing all the windfall profit you had gained. For an in depth knowledge on this subject, read Jason Zweig’s Your Money and Your Brain. This is the finest book on Behavioral Finance I have ever read.

Protect yourself from yourself with good judgment. Exercise discretion with logic, critical thinking, common sense, and experience,. Your thinking may be perfectly logical, but if only one premise is false, your conclusion will be false, too. Too many investors fail to question their premises. Use objective, critical thinking to evaluate the veracity of the premises. Without objective critical thinking, logic is useless. Whereas logic and critical thinking may be classified as “book smarts”, common sense and experience may be classified as “street smarts”. Common sense spares you time in not having to do unnecessary research, while experience teaches you to stay grounded.

Beyond the bottom line (The Financial Athlete #126)

May 12, 2009 by pastamanvibration

What if a river rafter were to say, “I burned 1000 calories today river rafting” and made no mention of the experience of river rafting? From a statistical point of view, the bottom line may be how many calories were burnt, but this entirely misses the point of why people love to river raft. Can anyone enjoy river rafting with the single-mindedness to burn calories? Of course not.

A single-mindedness obsession with the bottom line (earnings) drives senior management at some companies.  Too concerned about meeting this quarter’s target numbers, they are willing to lay off the most valuable employees to cut expenses. Here management rationalizes the layoffs with the cliche,  “Everyone is expendable!” This managerial philosophy engenders the destruction of the enterprise.

All assets cannot be found on a Balance Sheet. Key employees are Off Balance Sheet assets. Dismiss a well respected business-to-business sales representative and risk losing the clients to another vendor. Generally, clients feel more loyal to a likable and effective sales representative than the company he represents.

For residential real estate, the full value of a house cannot be conveyed in the MLS (Multiple Listing Service) data. You must go and visit the houses to evaluate the floor plan and quality of construction. Get a “feel for the place”. An artist instinctively knows as soon as she walks into a home whether the environment is conducive to creativity. Much value is intangible.

‘Wish you were here’ by Alpha Blondy

May 3, 2009 by pastamanvibration

16

Alpha Blondy, a native of the Ivory Coast, grooves Pink Floyd’s classic tune, ‘Wish you were here’. I love the addition of the bag pipes, which surprisingly fit in very well with reggae. I’m also pleased with the female background vocalists, who blend a gospel music texture to the song.

First the studio version, which I prefer (as usual):

And then the live version:
http://www.youtube.com/watch?v=v7o2jRQ66sI

Mindless Exercise (The Financial Athlete #125)

May 3, 2009 by pastamanvibration

footballers_test

Imagine a group who appear to be playing soccer but actually have no idea of how to play the game. The next day, they stand on the field again with no clue or even the slightest curiosity of how to play the game. Even more bizarre, this ritual of mindlessly moving the soccer ball is repeated each day. Of course, this scenario would be considered absurd by all but a similar scenario happens daily with mindless stretching and mindless exercise on the cardio machines. There is no mind and body connection whatsoever. In today’s society to do some activities mindlessly is “normal”. We are acculturated to behave with robotic responses. This is exemplified by the cashier echoing the impersonal farewell, “Have a nice day.”

In the yoga practice, stretching is never mindless for a yogi. Yoga means “uniting” in Sanskrit. Mind, body, and spirit are united through the breath and postures. Beyond this, yoga cultivates a sense of unity with the universe.

Fortunately, mindfulness need not be so philosophical or complex. To just visualize the movement of your bones in a stretch is an act of mindfulness.

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The natural course of mindless investing is losing. Mindless investors deserve to lose. This sounds callous until you consider that losing has a redeeming quality if you allow it awaken the mind to greater awareness. In all activities, engage mindfulness. To invest mindfully is to be in harmony with facts, reason and trends. Interestingly, you can be financially illiterate for Financial Statements and still engage in the mindful and yet simple long-term strategy of dollar-cost-averaging into the S&P 500. This strategy beats most funds which try to outperform the S&P 500. On the surface this strategy seems robotic, but I call it mindful because it takes discipline to execute.

Another mindful and simple strategy is to pay off the mortgage and live a debt free life. Although you may have become much wealthier if had leveraged debt with low interest into more lucrative investments, you achieved freedom from anxiety related to money.

2nd Place (The Financial Athlete #124)

May 1, 2009 by pastamanvibration

hurdle

In sports everyone wants to be in 1st Place. 2nd Place is not good enough. To the fans the 2nd Place person or team is nothing more than the loser who came closest to being the winner.

Investors think highly of new 1st Place Winners, too. These are companies that have created and penetrated a market for a new product or service. They are praised for actually executing the vision. Supposedly, these pioneering companies are blessed with “first-mover advantage”. More often than not, within a few years their dominant market share erodes. Another company comes along with superior technology, savvy marketing, greater financial resources, and professional management, or some combination thereof, and takes over the market. Here are some examples of 2nd Place Winners (2nd to market) usurping the 1st Place Winner (1st to market):

1st Place…………2nd Place

MySpace…………Facebook
Circuit City………Best Buy
Rio………………..iPod (Apple)
books.com……….Amazon
Netscape………..MicroSoft
Atari………………Nintendo

So much for the overrated, first-mover advantage. After developing wide awareness of a new product solution, these companies become thanklessly forgotten. Instead of investing in “exciting companies” with a pioneering strategy, wait for the stronger follower, the 2nd Place Winner with 2nd-mover advantage.

2ndplace1

Role Model (The Financial Athlete #123)

April 28, 2009 by pastamanvibration

Ribbit
by “pastamanvibration” (Ao)
(Copyright 2008)

“Rocket. Rabbit. Rodent,” croaked Abbott the frog.

“No. No. No!” cried his father. “It’s ribbit. Not rocket! Not rabbit. And certainly not rodent! Ribbit. R-I-B-B-I-T. Ribbit! No other croak will do!”

“But I can’t croak r-r-readit,” Abbott said meekly, his head bent down.

“Practice. Practice. Practice!” his father advised. “Practice until you cannot croak anything but ribbit. It is very strange for a frog to croak anything but ribbit.”

All night long Abbott croaked. He croaked, “Midget.” He croaked, “Widget.” He croaked, “Fidget”. And he croaked “ Fixit” and “Mixit”. But no matter how hard he tried, he could not croak ribbit.

Abbott’s croaks annoyed the frogs tremendously. The next morning not one frog mouth smiled. They gathered together, each sitting comfortably on their own lily pad. Frankie the big bullfrog pointed his fat frog finger at Abbott and yelped, “Who can sleep with HIM croaking nonsense all night? It hurts my frog ears. I say Abbott must go!” At once all the frogs but Abbott’s best friends and family croaked, “Ribbit!” But this ribbit was not a friendly ribbit. It was grunt. And it made Abbott shiver.

The frog king of the pond flung out his sticky tongue to catch a fly. The fly disappeared into his mouth as though being flushed down a toilet. Then the king cleared his frog throat and said, “Only the hiss of a snake sounds worse than Abbott’s croaks.” Then he turned to Abbott and barked, “Croak ribbit this instant or leave this pond.”

Abbott the frog jumped on center stage, a lily pad in the middle of the pond. His skinny frog legs trembled. His small frog heart beat as fast as a hummingbird’s. He took a deep breath to calm down. Air swelled his throat in the shape of a ball. His eyes bulged and gazed at the crowd. Then in the loudest croak he could muster he croaked, “Racket!”

Now tears began to fall from his eyes, like leaves falling off a tree in a rushing wind. He murmured, “As you wish, I will leave.” And his mother wiped his tears with her frog belly.

Before he could say, “Farewell, my fellow frogs,” his mother tied a sack with all his belongings to the end of a twig. She handed it to him and said, “Go west young frog! Hop west until you come upon a dragonfly. When you see the dragonfly, follow it wherever she leads. Do not fear. You are a big frog who can go off on his own. Someday you will become known as a great frog, Abbott. In every pond frog folk will tell your story for a thousand moons to come.”

But Abbott did not feel like a great frog. Instead, he felt like a forsaken frog from his first long leap away from the home pond. He leaped westward over grass and weeds and dirt and rocks. For seven days he leaped westward. His limbs grew weary, and his frog feet blistered. He felt he could not leap another inch even if chased by an alligator. He rested under the shade of a weeping willow tree. It was there he saw a dragonfly circle above his frog head. Suddenly, Abbott forgot about his weary legs and blistered feet and sad frog heart. He jumped blissfully over bushes to follow the dragonfly. And the dragonfly led him to a shimmering waterfall cascading into a pond.

“Home!” he said with much relief.

Night after night, Abbott croaked alone all sorts of sounds. He croaked joyfully new sounds like “exhibit” and “inhibit”. No frog was there to complain – that is until one night a young frog lady from some unknown place introduced herself with a toothless smile, “Hello. I’m Bridget.”

Abbott the frog’s face blushed. A frog’s face could blush no more, which – by the way – isn’t very much. He stared at his frog knees and introduced himself. Then in a low voice he said, “I cannot croak r-r-rip-it.”

Bridget laughed, but not at him. She replied, “That’s okay. I can’t say r-r-rip-it, either!”

In that very moment Abbott and Bridget became frog soul mates. Abbott had not been this happy since he was a tadpole. And it was not long before he himself became a father of dozens of tadpoles.

However, during this happy and hot summertime, not a drop of rain fell from the clouds. By the last days of summer the pond shrunk to half its size, while Abbott ballooned into a giant bullfrog, even bigger than Frankie the bullfrog. So loud was Abbott’s croak, little frog ears could hear it hundreds of frog leaps away.

One night as Abbott and Bridget were croaking “inhabit”, familiar frog faces appeared. Among these frog faces were those of Abbott’s mother and father, which glowed in seeing their beloved son. Other frog faces were the king’s and Frankie the bullfrog’s, which showed shame.

Now Abbott was very happy to see his family and old friends. He was even happy to see Frankie and the king. He jumped high off his lily pad and splashed into the water in a belly flop. This hurt his belly, but he did not care. He said, “What brings you here?”

Abbott’s father replied, “Our pond has become dry as a dead bone. First we dug burrows with our webbed feet and hid in the mud from the hot sun. But no rain ever poured and the mud turned hard as a turtle shell. We have been leaping for days to search for a new home pond. But everywhere we leaped was on dry land.

His mother finished the story, “Last night from a great distance, we heard a frog croak loudly, ‘Drink-it’. I shouted, ‘Abbott! Only my boy Abbott croaks ‘drink-it’! Follow his sweet sound!’ And so here we are.”

The frogs bowed to Francis and Bridget and pleaded, “May we live in your pond?”

Now Abbott and Bridget took a giant leap toward them. The frogs flinched, afraid Abbott’s heavy belly might land on them.

Bridget said with open frog arms, “Welcome!”

Abbott added, “Here you are free to croak anyway you please.”

From then on, frogs throughout the world croak many sounds besides ribbit. Some even croak “Abbott” and “Bridget”.

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In our culture we misplace role model status to elite athletes and billionaires. When news breaks of their shortcomings, people get disappointed in them. It’s unrealistic to expect them to lead exemplary lives. Most are as foible as the rest of us.

For me, the archetype of a noble and successful person is Joseph, the son of Jacob. His story can be read in the Book of Genesis. Only after writing the children’s book, ‘Ribbit’, did I realize it is an adaptation of the story of Joseph. Driven into a foreign land, both Joseph and Abbott were forced into unwanted circumstances. Both were motivated by guided imagery, Abbott by the dragonfly and Joseph in his trust in God who had a better plan for his life. Both never forgot where they came from or let the world crush them emotionally. Both remained true to themselves while adapting to new environments. Both ultimately succeeded to the highest level achievable despite setbacks. With power at their disposal, both were benevolent, granting freedom and a livelihood to those who had forsaken them. Both made the world a nicer place to live.

So in closing The Financial Athlete, I leave you with this role model to bear in mind.

THE END

Trust the racket (The Financial Athlete #122)

April 28, 2009 by pastamanvibration

superstock_1487r-65651

The discipline of an athlete is readily apparent by a lean and muscular physique. With long hours of weight training, aerobic activity, and proper diet, such a physique may be yours within only one year.

In contrast, the discipline of an investor is only apparent after many years have come to pass. His wealth has been accumulated incrementally.

The all too common impatient investor dismisses the disciplined approach because he craves wealth now. He has convinced himself that he possesses an uncanny ability to increase wealth exponentially, but in reality, he is out of control.

When my tennis instructor sees a student excessively move his body while swinging the racket, he advises, “Trust the racket. Keep the torso quiet.” This is nice way of pointing out that the student is out of control.

Sometimes, I hear my tennis instructor’s voice saying “trust the racket” in my head when I hit the volleyball on the beach with too much movement of my forearms (a bump). I also hear it when I become tempted to take on an outsized position in an investment with high risk. Metaphorically, the tennis racket is a reliable investment system. To “trust the racket” means to be disciplined to stay within its framework. The system must neither be too rigid nor too soft. It is flexible, yet governed by sound principles.

Alignment (The Financial Athlete #121)

April 26, 2009 by pastamanvibration

A baseball pitcher may try to ground out, or fly out, or strike out the batter. Whether the pitch is a fastball, curveball, changeup, or slider, the pitcher’s objective is aligned: Get 3 outs without a run.

Are your investments aligned with your values? Many are those who compromise good values in exchange for gain.

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A grandmother dressed in old and tethered clothes walked slowly on a sidewalk of an affluent community. Her right hand held the small hand of her grandson, while her left hand held the even smaller hand of her granddaughter.

Approaching the grandmother were two wealthy ladies dressed in the latest in high fashion, from wide brim hats to high heeled shoes. Gold, diamonds, and sapphire bedecked their necks, wrists, and fingers. Neither had ever experienced financial hardship. One said to the other, “Look at that old woman. She’s so poor she can’t even afford fake jewelry!”

Although the grandmother was old, her hearing was still quite sharp. Now face-to-face with the two ladies, she stopped before them and raised her grandchildren’s arms with hers. Tightly clinching onto their hands she said proudly, “This is my treasure, and it’s worth more to me than all the gold and silver in the world!”

(1. I heard the above story from Pastor Joel Osteen on television. 2. photo above: baseball’s most exciting pitcher to watch, Tim Lincecum)