Archive for June, 2008

Who’s in command? (The Financial Athlete #17)

June 30, 2008

“I’ll be in charge and you tell me what to do”. — Ao (pastamanvibration)

After a long rally, I was happy to win the point. Others watching complemented me for my hussle, but my tennis instructor was less impressed with who won the point. “Who was in command?” he asked. The instructor read my puzzled face. “Who was in command of play? Who hit the ball deep left then deep right back and forth several times before a drop shot and then back to the baseline?”

“She did,” I acknowledged.

“Most people focus on winning the point. Focus instead on taking command. If you take command, you won’t necessarily win the point but you’ll win games.”

Do you take command of your emotions with investing?

For any stock trading at an all-time low, it is natural for average investors to harbor negative emotions including frustration, anger, and bitterness. It is also natural for them to feel euphoric if the stock price is trending upward at an all-time high. Average investors first and foremost react emotionally to stock price action. In the mind of the average investor, even if the underlying company of the security shows the identical business circumstances (same financial statements, prospects, contracts, et cetera) and the stock trades at an all-time high of $20 their world is like being relaxed on a beach in the beautiful tropical island of Bora Bora in Tahiti, but if it trades at $2 their world is like being trapped in a fierce sandstorm in the Saharan desert.

Smart investors set themselves apart by focusing on intrinsic value and compare this market price. When the market price trades far below than their estimated value of intrinsic value, they pounce. Average investors have no idea how to estimate intrinsic value, or even know what this means.

What’s in command in your mind? Emotions dictated by price action or rational thinking supported by objective research.

“Attitude is a little thing that makes a big difference.” – Winston Churchill


No clock (The Financial Athlete #16)

June 26, 2008

In the popular team sports of basketball, soccer, football, and hockey, teams play not only against each other, but against the clock. Take a big lead with several minutes remaining and let your star players relax as the bench warmers close out the game. Not so with the bound to no clock baseball, for which Yogi Berra famously said, “It ain’t over until it’s over.” It’s easily conceivable to be up a comfortable 7 runs in the 9th inning and yet lose the game.

Are you an investor subject to the clock? Stated another way, did you set a short-term deadline to get a high return-on-investment? If yes, you’ve put yourself in a pickle. In case you don’t know, a pickle is a baseball term to mean a runner is trapped between two base players (for example, 2nd and 3rd base position players) who throw the ball back and forth to each other until the nearer player tags out the runner.

In the real world, business progress and real estate development often take longer than anticipated by leadership, sometimes much longer. It’s not uncommon for investors who had made no allowance for long delays to lose patience and sell at a loss. Some sell because they cannot afford to hold longer due to pressures of their own cash flow needs. It’s a shame to see an investor make the right long-term choice of investment but sell prematurely because progress is slower than his predetermined time line.

Play free of the clock. Eliminate arbitrary time lines, whether established by you, management, or the developer. If time is not on your side, you’re overweight on your investment.

“We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.” — Warren Buffett

Where’s the blood on Che Guevara’s hands?

June 23, 2008

On October 12, 1992 I walked up to Coit Tower in San Francisco to gaze upon the statue of Christopher Columbus. The day marked the 500th Anniversary of his discovery of the new world. I unexpectedly would find the statue to be a work of collaboration of artists, from that of the sculpturer and a stealth painter who with a few strokes of red paint changed the entire emotional content of the statue. The red paint depicted blood spilling from his hand grasping a blood stained sword. These few strokes of red paint left a deep impression upon me, without which the statue would have remained a forgetful figure. The red paint was removed within days. Mankind insists on whitewashing history to preserve its myths.

I recalled this vivid memory upon reading of a new 80 foot bronze statue of a Che Guevara standing proudly in his hometown of Rosario, Argentina.

Who was the real Che Guevara? Was he the compassionate man of the people as portrayed in the eye-opening film, The Motorcycle Diaries? Or, was he the brutal butcher portrayed in the underrated mini-series, Fidel. Perhaps, both were true. As a younger man, he may have shunned violence. Then later on in life, when he donned the fatigues of war, he believed it became necessary to purge — MURDER! — real and imagined enemies of a Stalinist, hardline communist ideology.

The new statue of Che Guevara is incomplete. Where is the blood on his hands?

I can’t believe I agree with Karl Rove

June 22, 2008

In this Wall Street Journal June 19, 2008 Op-Ed, he makes a lot sense.

On the other hand (as often is the case, there are two hands), Karl Rove will never publicly acknowledge the primary purpose of going to war in Iraq was to establish what amounts to an American oil colony to secure a steady supply of oil for America for years to come.

Al Gore, the perfect candidate for Vice President

June 18, 2008

Al Gore is the perfect compliment to Barack Obama. Few question Obama’s competence, but his lack of experience is undeniable. Al Gore fills the gap with 8 years of experience as a proactive Vice President.

Some fear a President Obama would go tax crazy and social spending will skyrocket, worsening the federal deficit. Al Gore was the Clinton Administration’s spendthrift, decreasing the size of the federal government. Under his urging and that of Leon Panetta, the Clinton Administration made fiscal responsibility a national priority.

Obama’s incessant cry is for change, but is his charisma magnetic enough to stir America to remain firmly committed to fundamental change? That’s too much to ask of anyone. Gore would offset some of the pressure of high expectations resting on the lonely shoulders of Obama.

Al Gore is also the champion of the environment and is respected internationally. With Al Gore as Vice President, America could regain its international prestige lost so precipitously under the incompetent Bush Administration. One key lesson from the Bush Administration is that a President is only good (or bad) as the people he surrounds himself with in his administration. Obama would be wise to choose a Vice President with high stature, without worry of being occasionally overshadowed by him.

Al Gore is the obvious first choice for candidate for Vice President, but would he accept? I’m now inclined to believe he would. Al Gore must turn a new page in building his legacy and he’s passionate about stewardship of the environment. More books and films will not do the trick. He must hold a seat of power, where he can be a force for monumental change.

A game of inches (The Financial Athlete #15)

June 17, 2008

Golf is the epitome of a “game of inches.” To miss one put by less than an inch can cost the game. Professional golfers practice puts for thousands of hours. Without frequent practice, even the best of them can lose their touch. Much time alone dedicated to practice will not do. The mind of the golfer must be completely concentrated.

One aspect of investing is the “game of inches”. Consider how Warren Buffett spends hours combing through Annual Reports and SEC filings. If you choose to invest in individual stocks, you should do no less. Read thoroughly financial statements and the fine print. Readng SEC filings may be an intimidating exercise at first, but you will grow accustomed to the parlance. Don’t buy until you understand the material. What good is due diligence without understanding? This is like putting without concentrating. If you are not yet financially literate, then you are not ready for investing in individual stocks. Fortunately for real estate investing, help is easier to find with a real estate attorney who can make sense of the confusing legalese. Never be too proud to ask for help from a competent accountant or lawyer if you need a clearer understanding of an investing prospect. These people are trained to play the “game of inches”.

Par 5 (Financial Athlete #14)

June 16, 2008

Before teeing-off a golfer knows the par for the hole. He analyzes the landscape before each stroke. His clubs equip him for a wide range of possibilities of where ball will land, including a wedge for the sandpit. This is how an experienced investor patiently goes about his business.

In contrast, an overconfident, novice investor pays no attention to par. He approaches investing as though a hole-in-one is an everyday event for a golfer, regardless of the distance of the hole. Therefore, he uses only one club, a driver. In his inexperienced mind, all will go smoothly. The wind will never carry the ball off the fairway. The ball will never bounce off a tree or land in the pond or sandpit. His game is driven entirely by positive thinking. All unpleasant facts are dismissed. Often it takes a great financial loss to awaken him to gaze upon what is, rather than how he would like things to be.

(Photo above: Pebble Beach, CA golf course)

On balance (Financial Athlete #13)

June 13, 2008

In gymnastics and martial arts, balance cannot be overemphasized. In other sports, balance is rarely discussed.

Portfolio managers typically stress the importance of a balanced portfolio for paper assets. Investments in stocks are spread across virtually all sectors of the economy, and a significant percentage of the portfolio is kept in cash and invested in bonds to hopefully offset any downturn in the price of stocks. This is how automatons control assets. This approach is far too mechanical for anybody aiming to achieve big returns. It’s designed to keep portfolio managers from failing miserably.

An emphasis on mechanics is frequently subscribed to in sports instruction as well. My martial arts instructor has a different philosophy about teaching Wing Chun. “Balance art with science”. Art calls for the natural flow of the body and impulse responses (there’s no time to think). Science calls for aligning the body properly and impulse training to defend and attack effectively.”

Investing in stocks for high returns while managing risk involves both art and science. Qualitative matters such as evaluating management competence and integrity, market trends, and the company’s reputation in the industry fall under “art”. Quantitative matters such as reading financial statements and ratios fall under “science”. In the latter, search for safety and intrinsic value below market price. In the former, search for aggressive growth opportunities to achieve a several fold return of a long-term investment.

Now is not enough (Financial Athlete #12)

June 13, 2008

During game time your mind must be fully present to maximize performance. Leave your personal problems behind when you set foot on the field or court. The thrill of sports can only be experienced by living fully in the present. Perhaps sports are so loved because it is one of the few activities in the day when we fully live in the present.

Off the court or field if you aspire to be an elite athlete or investor, now is not enough. Visualize who you want to be become. Holding fast onto this mental image will motivate you to practice or study with more intensity and duration. Success begins in the mind. A conscious exercise of mental imaging of whom you desire to become permeates into the life-changing subconscious mind.

Great players and investors are created by design, not by chance. Albert Einstein famously said, “Imagination is greater than knowledge.” Through imagination, we create. Through knowledge we refine our creations.

Don’t compete (Financial Athlete #11)

June 12, 2008

An athlete trains for strength, endurance, balance, and flexibility. Training for flexibility should be approached gently. The tendency for many athletes is to push themselves too hard with flexibility. Rather than enhance athletic prowess as intended, injuries often result.

Good yoga teachers encourage students to “listen to your body” and “don’t compete against others” to avoid injuries. Better a half pose in good form then a forced full pose, even if the person next to you belongs on the cover of Yoga Magazine. A good yoga teacher will tell you to focus on the breath and not on the extent of the stretch.

Competing also can cause “financial injuries” for investors who place to much pressure on themselves for high returns. While I believe it’s good to take on some risk and invest beyond your comfort zone for sound investments, to do so excessively is over-stretching. An example of this kind of over-stretching is borrowing from credit cards and home equity lines of credit to finance purchases of stocks.

Now you may think yourself smarter than that and limit your debt exposure to well within your disposable income to pay off the monthly interest charges may sound reasonable. But later the prices of your stocks tank. Your supposed discipline to limit debt exposure suddenly vanishes. You act impulsively and increase your positions financed by more debt. While you may get lucky to see stock prices recover, a potentially devastating pattern develops. Eventually, large positions in a few stocks (or one!), accumulated from averaging down, never bounce back or when they do it’s too late…financing the debt is unsustainable.

Don’t compete. Be steady by placing more importance on managing risk over chasing returns. To focus on being steady runs parallel to yoga’s mystical “focus on the breath”. You’d be in great company to do so. The master of a steady path to investing is Warren Buffett.

“I don’t look to jump over 7-foot bars. I look around for 1-foot bars that I can step over.”
–Warren Buffett

“Real learning comes about when the competitive spirit has ceased.”
— J. Krishnamurti