Archive for July 11th, 2008

The Yin and Yang of Pitching (The Financial Athlete #22)

July 11, 2008

Yang is active. Yin is passive. Yin and yang must be in balance.

Pitching a baseball is yang. Resting the pitcher’s arm is yin. A pitcher must have balance with the yin and yang of pitching to maximize performance. Overuse and overload, which cause injuries, are forms of too much “yang”. Overuse is pitching too often. Overload is pitching too much in one outing. Without adequate recovery time (yin), pitchers lose control and velocity due to arm fatigue.

Novice investors tend to buy a stock all at once, leaving no cash behind. This style of investing is characterized by too much “yang”. Later, they often experience buyers’ remorse because the stock price declines. Rather than throw all your cash at once in chasing a stock, initially invest no more than 1/3 of your allocated funds for it. Then study how the company performs in the following quarter. Add to your position another 1/3 if a disconnect occurs between the stock price and a robust company performance, or if your expectations grow for earnings and cash flow. Once again study how the company performs in the following quarter. If you are still convinced the stock is selling below its intrinsic value, you can add your final 1/3 position. Do not add beyond your original allocation of funds, even if the stock price declines. Allocating an extremely high percentage of your portfolio suggests lack of self-control, another form of too much “yang”.

This system of gradual entries protects your downside. If later you become shocked to learn of deteriorating company performance, you may lose less.

“I never threw an illegal pitch. The trouble is, once in a while I would toss one that ain’t never been seen by this generation.” – Satchel Paige


Pole vault your way to financial freedom (The Financial Athlete #21)

July 11, 2008

For the pole vaulter the initial height of the bar is easy to leap over. Next, the height of the bar is increased incrementally until the pole vaulter can no longer leap over without touching the bar. The highest height leaped over marks her final score. Therefore, it cannot be said of a pole vaulter that she is only as good as her last attempt, which is a failure.

Some people approach investing with the continuous, all chips on the table, casino style gambling. In the end, losing is a sure outcome. The forever flipper of residential real estate is a good example. As long as prices were increasing, flipping of properties was a profitable proposition. Flipping took on a frenzy in some regions of America. A housing bubble ensued, which was also propped by lower capital gains taxes and mortgage borrowers’ refinancing with more debt.

It’s inevitable for the market to return to equilibrium. In an asset bubble, prices will decline to reflect the much lower intrinsic value of the properties. The flippers, who had felt so rich only months earlier, became to feel poor because they found themselves stuck with mortgage loans exceeding property values and inadequate rental income to cover debt.

Approach investing like pole vaulting. Increase wealth incrementally, without putting a substantial risk on your assets. Your money should not be played like yo-yo…up and down, up and down.

Think and set goals in terms of FINANCIAL FREEDOM, rather than pursue an elusive pot of gold at the end of the rainbow. The bars to leap over are layers of FINANCIAL FREEDOM. The first bar is meeting all expenses, including paying off the balance of credit cards. The second bar is saving and investing at least 10% of your income. The third bar is owning a home debt free or with passive income exceeding mortgage interest. The fourth bar is passive income surpassing earned income to the point where there is no need for the earned income. The fifth bar is making a difference in your community or country or world thanks to your financial support.

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” — Warren Buffett