Archive for May, 2008

Home court advantage (The Financial Athlete #8)

May 27, 2008

If you’re watching the NBA Playoffs, you won’t be surprised to find the home team win most of the games. Home court advantage is for real in basketball. It’s equally for real with investing.

In the investing world, home court advantage is when you experience some control over the asset. Being an entrepreneur who runs a business or owning real estate leased to others gives you some control over these assets. In general, it’s wiser to invest most of your money in assets where you can exercise some control. I deliberately say ‘some control’ because it’s an illusion to think you ever have complete control. It’s futile to pursue an unobtainable goal of complete control.

When others and external events completely control the asset, you lose home court advantage. Before you invest in a company you don’t control, make sure management has competence and integrity, a combination of qualities sometimes difficult to find.


‘Be like water’–Bruce Lee (The Financial Athlete #7)

May 26, 2008

“Empty your mind, be formless. Shapeless, like water. If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot it becomes the teapot. Now, water can flow or it can crash. Be water, my friend.”
–Bruce Lee

In sports to ‘be like water’ is to be a finesse player. Supreme examples today are Kobe Bryant for basketball and Roger Federer for tennis.

How can an investor be like water?

First, don’t be obsessed with being right or wrong. All cannot be known. All cannot be controlled. When your original investment thesis falls apart — flow like water — sell and move on another investment. Better to take your losses than remain stuck in the quicksand of a dead asset. When you scrutinize a great investment opportunity — crash like water — invest!

At the end of one’s life the biggest regrets are often not what was done but what was not done. Sometimes, dare to break your tried-and-true investment rules, but never to an extreme. This presupposes you have them. You should.

“Be like water making its way through cracks. Do not be assertive, but adjust to the object, and you shall find a way round or through it. If nothing within you stays rigid, outward things will disclose themselves.”
–Bruce Lee

Robert Mondavi’s secret to long life

May 24, 2008

A friend told me this last night: When asked of the secret to long life, Napa Valley wine entrepreneur Robert Mondavi replied, “Every day…a massage, a swim, and red wine.”

Robert Mondavi died this week at age 94.

Court awareness (The Financial Athlete, #6)

May 24, 2008

Magic Johnson, my all-time favorite basketball player, was the most ‘complete player’ to ever play the game. One magical quality of his was his acute court awareness of the movement of all players on the court and how to leverage this to the L.A. Lakers’ advantage.

To succeed in investing, you need ‘court awareness’ too. This means keeping up with market trends, industry news and understanding gaps between current market prices vs. historical, long-term valuations. Lack of ‘court awareness’ can hurt financially.

Three years ago a hard-working gardener told me he was eager to buy a home. I urged him, “Wait a few years to buy a home for at least 20% less. Prices are too high compared to rental income from residential properties and the average income of workers in the local area. To restore a balance in home prices, either inflation will skyrocket or home prices are going to crash. High inflation is a remote possibility. So, I’m expecting a crash.”

The gardener gently argued back, “I knew I should’ve purchased a home last year, but I waited. Now prices are 10% higher. I don’t want to wait. If prices go up another 10%, I won’t be able to afford to buy a home.”

Within weeks the gardener purchased a home. The market price for that home is worth about 30% less today. I don’t know if the gardener still lives in the home or lost it to foreclosure, but it’s sad to see someone work so hard for money and then lose it due to financial ignorance.

Play within your level of competence (The Financial Athlete, #5)

May 23, 2008

Icarus could fly. With feathers and wax he fashioned wings. “Do not fly close to the sun,” he was warned on the day he escaped Crete. Flying gave him immense  excitement. He paid no heed to the warning and flew as high as he could soar, closer and closer to the sun. Drip by drip the wax melted, and to the sea Icarus plummeted.

Icarus, a mythological figure of ancient Greece, is a metaphor for plummeting performance as a result of playing far beyond your level of competence.

The natural tendency for energetic people new to the game of tennis is to whack the ball hard. It’s a thrill to see your opponent unable to return a fast flying ball. You feel like a pro. The only problem is you lose the game because of too many unforced errors (unless you have an opponent who plays the same way). For every one of those spectacular shots delivered by your racket, nine other bullet shots either hit the net or go past the baseline or sideline.

When my tennis instructor sees a student wildly hit the ball, he advises, “Play within your level of competence. Reduce the pace of the ball to keep the ball in play. Work on consistency before pace. Play with control!”

Many new investors invest their money like they’re whacking tennis balls. Experienced traders call this ‘dumb money’. Like sharks biting on bait, they don’t hesitate to devour it.

My mantra is not “Diversify. Diversify. Diversify.” But if you don’t know what you’re doing, diversify. If you don’t have time to do proper due diligence, diversify. If you’re not a disciplined investor who’ll work within the framework of an effective system, diversify. Otherwise, the stock market or other investment vehicle is just another casino.

After you’ve honed investment skills, which normally takes up to 7 years of study and practice, then you’re ready to take on a more concentrated portfolio. Unless, of course, you’re prepared to pay a high tuition at the school of hard knocks.

A soft war on Islamic radicalism

May 22, 2008

The battleground against Islamic radicalism must be fought in the hearts and fertile minds of future generations through education. New York Times article, Turkish Schools offer Pakistan a Gentler Vision of Islam,” examines the impact of a Turkish Sufi Islamic scholar’s vision for Pakistan.

‘The Moon cannot be stolen’ (The Financial Athlete, #4)

May 22, 2008

Here’s another one from Zen Flesh, Zen Bones.

Ryokan, a Zen master, lived the simple life in a little hut at the foot of a mountain. One evening a thief entered the hut only to find nothing to steal.

Ryokan entered the hut and told the prowler, “You may have come a long way to visit me, and you should not return empty-handed. Please take my clothes as a gift.”

The thief was bewildered. He took the clothes and slunk away.

Ryokan, sat naked, watching the moon, “Poor fellow,” he mused, “I wish I could give him this beautiful moon.”

Ryokan connects to the moon on a spiritual plane. At that moment, the intangible moon is his most prized ‘possession.’

Sports and investing are crafts. Cherish a craft like Ryokan cherishes the moon. People envy the results produced from a craft, but the process toward mastery in a craft is the real prize.

All will not go smoothly in the process. You will lose, make mistakes, and get frustrated. Accept this as part of the long process to mastery. Don’t try to rush into mastery. This results in injuries…physically for the athlete, financially for the investor. Mastery cannot be rushed into.

Placing a large percentage of your portfolio in chasing very high returns with high risk is a form of rushing into mastery. Never sacrifice proper money management for the potential of exceptionally high returns.

(above picture: ukiyo-e by Utagawa Hiroshige)

‘The truth about saturated fats’ by Mary Enig and Sally Fallon

May 21, 2008

The truth about saturated fats
by Mary Enig, PhD, and Sally Fallon
authors of: Nourishing Traditions – The Cookbook that Challenges Politically Correct Nutrition and the Diet Dictocrats

This is one of the most important articles I have ever read on nutrition. It’s long but probably compelling enough to change your eating habits.

The ball is sacred! (The Financial Athlete, #3)

May 21, 2008

To urge his students to focus on the ball and hustle to get to it, my tennis instructor says, “The ball is sacred!”

In the investing the world, there’s also a ‘ball’ to keep your eyes on. A lot of investors don’t know where to look to find the ball. Many turn to others with stock tips, thinking they must know. Often they don’t know either but won’t admit it…’the blind leading the blind’.

Cash flow is the sacred ball. Read and understand the Cash Flow Statement to come to a realistic viewpoint of the lifeblood of the company or rental real estate.

A good tennis player studies the ball in relation to the opponent’s stroke and from where he hits the ball, and the force and direction of the wind. For stocks, cash flow must be studied in relation to the Balance Sheet, revenue and earnings, growth rates, the business model, outstanding number of shares, and the economy’s impact on the industry.

“Risk comes from not knowing what you are doing.”
–Warren Buffett

‘A cup of tea’ (The Financial Athlete, #2)

May 17, 2008

Here’s a story of a Zen master, taken from Zen Flesh, Zen Bones.

A Cup of Tea

During the Meiji era (1868-1912) in Japan a university professor visited Nan-in to learn about Zen. However, Nan-in sensed the professor’s intent was to impress him with his own knowledge.

Nan-in served tea. He filled the professor’s cup but then kept on pouring.

The professor watched the overflow until he no longer could restrain himself, “It is overfull. No more will go in!”

Nan-in replied calmly, “Like this cup, you are full of your own opinions and speculations. How can I show you Zen unless you first empty your cup?”
It’s not uncommon for investors to “marry” their stocks. In other words, they remain loyal for better or worse…too attached. Their “cups” are often filled with rigid preconceived notions. A good example of this is a firm, predetermined target price to sell. Often, this exit strategy is based upon an unrealistic target price.

In martial arts, beginners often guess where their opponent will strike. It’s not long before they guess wrongly and are struck with a punch or a kick. In contrast, an experienced martial artist empties or frees his mind of the noise of guesswork. Only this way can he fight effectively. He watches his opponent’s body language for cues of the next strike.

To empty the mind does not suggest an oblivious state of being. Rather, an empty mind sharply perceives its surroundings. An empty mind responds to what is, not fear or greed or endless rationalizations.

Empty your mind.