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

.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.

____________________________________________________

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

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.”

——————————————————————–

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.”

———————————————————————————————————

“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)

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)

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

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)

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.

———————————————————————————

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.