Archive for August, 2008

What’s your dosha? (The Financial Athlete #49)

August 31, 2008

By way of yoga, I have learned of ayurveda, a medicine system from India dating back 5,000 years. Ayurveda teaches that the human body and mind are comprised of three psycho-physiological functional principles called doshas: Pitta (fire), Vata (wind), Kapha (earth). Most people are dominated by one or two of these.

Interestingly, the dominant dosha for your body may be different than for your mind. Here only the doshas of the mind is explored. It’s important to know your strength and weaknesses and why you do what you do including your manner of investing.

Vata (wind or air)
Positive characteristics: spontaneous, imaginative, active, flexibility, visionary, trend setter
Negative characteristics: restless, nervous, anxious, acts too hastily

The vata mind craves excitement. Thanks to the vata mind we have extreme sports and funding for new companies with promising, revolutionary technology. The investor with the vata mind is in tune with trends. She focuses on the future. Stocks with tremendous growth prospects attract her. Although she may identify future trends correctly, she tends to invest too prematurely as progress materializes more slowly than she had anticipated. This reality of life tires her with worry.

Pitta (fire)
Positive characteristics: ambitious, hard-working, intelligent, strong-willed
Negative characteristics: anger, critical, loss of self-control, overconfident

The prototype of warrior and athlete are pitta types. The pitta mind loves to compete. A Pitta tends to rise to the top or sink to the bottom. He does not fear failure because he believes he can always bounce back.

The pitta type over commits on investments because he is on the fast track to success. For him to take on big risks for potentially big returns is a noble venture. The challenge for the pitta type is to control aggression. If he learns to control it, then this is the fire which nurtures the soil. If left uncontrolled then this is the fire of intense heat which damages the soil.

Kapha (earth)
Positive characteristics: down to earth, analytical, methodical, patient, calm, affectionate
Negative characteristics: stubborn, lazy, slow moving, more attention on past

In sports kaphas are the heavyweight athletes. Think sumo wrestlers and weightlifters. The Kapha type likes to take it nice and slow. He is good at saving money, as his main concern is return of principle rather than return on principle. At the edge of his comfort zone is investing in brick and mortar or solid, blue chip stocks. When the economy is sluggish, the kapha type is the wisest. But when boom time rolls around, he still behaves with excessive caution for fear the economy suddenly will turn for the worst.

All three doshas lie within us. Being conscious of which dosha is dominant is the first step towards bringing them into balance. For example, when we are conscious pitta is too strong we should engage kapha qualities.

One more (The Financial Athlete #48)

August 28, 2008

“Ask yourself: ‘Can I give more?’ The answer is usually ‘Yes’.” – Paul Tergat

During track practice in high school we had to run around the track with no idea how much more running we had to do on that day. After running about a mile someone would pass the coach and ask, “How many more laps?” He’d always replied, “One more.” In reality, we could have 4, 8, or 16 more laps to go, but he wanted us only to think about “one more”.

Tell yourself, “one more” every month you set money aside to invest and don’t worry about how much more you need to invest. “One more!”

“Once you learn to quit, it becomes a habit.” – Vince Lombardi

Respect the lines (The Financial Athlete #47)

August 27, 2008

Lines are very meaningful in sports. Without lines in sports, chaos would ensue. Lines give order to the game. The first runner to cross the finish line in a race is the winner, but to cross the side line is a lane violation and would disqualify the runner.

Lines mark boundaries of in and out of play. Just inside a line, a baseball batter hits a home run. Just outside this same line, it’s a foul ball.

Lines delineate the gridiron from the sidelines to the endzone and in between from the 1 yard line to the 50 yard line midfield and down the second half of the field.

Lines play a tremendous role for technical analysis which is used for stock trading. A useful tool of technical analysis for investors are trend lines, which indicate the direction of the price trend of a stock.

The first lesson for investors of stocks should be watching the directional or trend line of the stock price. Even a small child easily can recognize the direction of lines, whereas it may take years to become financially literate.

If the trend line slopes downward, be weary of buying. Better to wait for a base to form or a price reversal before buying. Do not be stubborn with the intent to buy at bottom. Extremely rare or non-existent is the person with an uncanny ability to consistently call bottom correctly.

If you buy at what you believe to be bottom but the price continues to descend, what will you do? The tendency of an average investor is to buy more at a lower price. If it drops further and further, the average investor continues to accumulate. Savvy investors mock this process of averaging down as “catching a falling knife.” Keep in mind the objective of investing is high returns, not to try to buy at bottom. Fighting the trend line more often leads to negative returns and imbalanced portfolios rather than riches.

There is wisdom in the common refrain of “Do not fight the tape!”. Respect market forces. Sellers may know more than you. Investors cannot see what may lurk behind the publicly disclosed information.

Move forward (The Financial Athlete #46)

August 26, 2008

“Be like grass, although cut again and again it never ceases to grow.”— Ao (pastamanvibration)

What can football teach us about investing? Do we need higher testosterone levels to enhance performance? No. Football teaches us how to move forward to score. Occasionally, a long bomb is thrown. This fits into the offensive mix, but most offensive plays in football are not designed to score a touchdown. They’re designed to get a first down with runs and short passes. One first down leads to another, bringing the football closer and closer to the goal line.

The nature of man is to move forward. It is not the nature of man to live most of his life with the stillness of plants. Without moving forward, man stagnates or regresses. But moving forward should be done prudently, as the example of going for first downs in football with most plays demonstrates.

To move forward in a solid manner with investing seek positive cash flow. Passive income distributed from real estate holdings makes for the most wonderful investment. Besides the distribution of income, you may benefit from a considerable long-term appreciation of the value of the property. This would give you the opportunity to either sell the property for a hefty capital gain or refinance to use the loan amount for investing into other expected, higher yielding assets. Wisely using the power of leverage can multiply your net worth.

As for stocks, invest in companies moving forward — companies with potential to increase dividends. Be demanding! Purchase shares only at a reasonable price. Virtually all your investment should be placed with companies achieving positive free cash flow. Seek moving forward trends in revenue, cash flow, earnings per share, and equity. The key to substantial, long-term returns is holding shares of profitable companies experiencing consistent growth as long as the stock price is not severely overvalued as measured by conventional valuation metrics.

Companies move forward organically or inorganically. Favor those with organic growth, where its core business flourishes. Consistent organic growth is a key indicator of managerial competence. Do not be impressed with companies characterized by inorganic growth, where growth comes by acquisitions, mergers, or takeovers. Inorganic growth companies tend to collect mediocre business units which may not be synergistic with other business units within the corporation; and inorganic growth often comes at a price of substantial corporate debt.

To invest in beaten down, distressed companies is retreating, not moving forward. Yes, you may get lucky with a turnaround, but chances are you will bring upon yourself “the bad karma” plaguing the company. More likely, distressed companies will stagnate or shrivel your portfolio. The same holds true for most penny stocks.

If you are uncomfortable investing in stocks and real estate, then pay off your mortgage first or invest in the more secure TIPS (Treasury Inflation Protection Securities) or FDIC insured short-term CDs if its yield is greater than the rate of inflation. This too is moving forward, although more so at a turtle’s pace.

“The investor of today does not profit from yesterday’s growth.” — Warren Buffett

(Photo above: Reggie Bush playing NCAA football at USC)

The tragedy of strategy (The Financial Athlete #45)

August 25, 2008

“When people ask me what really makes a good manager I say two words…good players. All that strategizing stuff is overrated. Games are won or lost by how well the players play, not how well the managers manage.”– Yogi Berra (from his book, You Can Observe A Lot By Watching).

Most business competitive strategies fall under either cost leadership, differentiation, or a focus strategy. These generic strategies were classified and discussed at length by Michael Porter, the guru of strategic management. If there’s anything an M.B.A. remembers from graduate school 20 years later, it’s generic strategies because these are an integral part of the M.B.A. curricula.

Senior management are well versed in the generic strategies. Even incompetent managers know how to speak what I call “strategese”. Of course, having a strategy gives you an edge over competitors who have no sense of direction. But more important than strategy is execution. The #1 question I ask myself in evaluating management is “Can they execute?” To judge this I not only evaluate management’s level of competency, social skills, and drive, but also (1) the company’s (and products’) reputation in the industry; (2) their connections with the investment community; (3) their connections within the industry (for example, distribution channels).

Writing a good business plan is not difficult. Neither is making an organized presentation with computer generated bar charts and pies. Don’t be too impressed by these. To actualize lofty goals separates the men from the boys in terms of real leadership.

The tragedy of strategy for investors is to be deluded into believing execution automatically will follow someone’s articulate road map to success.

(Photo above: Yogi Berra, who will always be remembered for his oft quoted: “It ain’t over ’til it’s over!”)

Sweet surrender (The Financial Athlete #44)

August 21, 2008

Muddy Road
(A Zen story)

Tanzan and Ekido were traveling together down a muddy road. Heavy rain was falling.

Coming around the bend, they met a lovely girl in a silk kimono and sash, unable to cross the intersection.

“Come on, girl,” said Tanzan. Lifting her in his arms, he carried her over the mud.

Ekido did not speak again until that night when they reached a lodging temple. Then he no longer could restrain himself. “We monks don’t go near females, especially young and lovely ones. It is dangerous! Why did you do that?”

“I left the girl there,” said Tanzan. “Are you still carrying her?”

———————————————————————————–

The last pose in a yoga class is shavasana, which translates as dead man’s pose. Simply lie on your back, chin tucked in, palms out, and toes pointing out. Anyone can do the posture physically. The difficulty lies in achieving the purpose of shavasana, which is bring yourself into a state of total relaxation. How? By surrendering…letting go of the busy mind burdened with stress, regrets, and the compulsion to keep busy. If you can do this, you will understand why my yoga teacher calls this “sweet surrender.”

Shavasana will not burn calories, build muscle or flexibility. In our culture which values doing over being, this posture seems like a complete waste of time. Ironically, it’s the most important pose in yoga. Surrendering is essential for mental health. What good is carrying a perfect body if the mind is perpetually disturbed?

In the subconscious mind there are four responses to a stimulus: flight, fight, freeze, and surrender. Flight, fight, and freeze are untrained responses. Only surrendering always requires a conscious effort. In the story above, when Ekido refused to help the girl his response was flight, but after Tanzan carried her across the river his response changes to fight. Hours later Tanzan instructs Ekido on how to release himself from the burden of a prolonged fight response with the response of “sweet surrender”.

Investors often are stressed with a prolonged fight response, which may endure for years and debilitate health. To progress these investors must learn to surrender. The mind must let go of missed opportunities, losses, and of being misled. Surrending is accepting things as is (“It is what it is”). From here the investor can move forward to build a brighter future with more wisdom.

———————————————————————————

The concept of ‘surrendering’ is not unique to Eastern philosophy and religion. In the West, there is the notion of surrendering to the grace of God, because by our own strength we are too weak.

Surrendering to the divine (by Ao)

Let my heart be comforted
for you are my comforter

Let me be strong
for you are my strength

Let me be loving
for you are love

Oh Lord, let me be your child
for you are my father

(Above: The kanji (symbol) for Zen)

Is China fascist?

August 17, 2008

Some of China’s opening ceremony of the Beijing Summer Olympics had the tinge of the pageantry of Germany’s 1934 Nazi Party Congress as filmed in Leni Ricterstahl’s progaganda piece: Triumph of the Will. Is China a 21st century fascist state? Before exploring this question, I’ll touch upon what China is not. China is neither a liberal democracy or a traditional communist state.

Under communism the means of production is controlled by the state. This economic system is severely flawed, as it inherently does not respond to market forces to allow for natural, organic growth of the economy. This results in a misallocation of resources including management, who are selected on the criteria of party loyalty rather than proven competence within an industry.

For years China’s backward economy failed to progress under communism, while the economies of liberal democracies of the world flourished. (The below artist’s depiction of Mao sleeping while surrounded by a sea of dinosaur figures vividly conveys the idea of a sleeping China in an economic dinosaur age under communist dictator Mao.)

The Chinese state (federal government) does not espouse liberty as a virtue. Freedom of speech, religion, and affiliation suffer restrictions. The state hammers dissent and the people fearful of retribution acquiese. Nor does the state pretend to be on a path toward democracy. On the contrary, under a strengthening economy the power of the state and it’s global reach expands. Feeding the economy is a system of predatory state capitalism. Predatory on unskilled laborers who are paid meager wages. Predatory on the environment and the people’s health with pollution clogging lungs in urban areas. And predatory against foreign competition as its currency is artificially devalued by more than 20% and dumping is tolerated for the sake of dominating world market share. Despite its outrageous shortcomings, China is succeeding in developing itself into the world’s next economic superpower, on a projectory to surpass the size of economy of the United States of America and the European Community within 50 years despite its aging population. Already 300 million of its 1.2 billion inhabitants have entered middle class status or above. Should we fear this emerging economic giant? Is China indeed a fascist state?

Under traditional fascism one leader controls the state apparatus enforced through a single political party while the means of production operate under the principles of capitalism. Arguably, modern Russia aptly fits this description as it is widely perceived Putin is its dictator. China’s state, on the other hand, is not controlled by an individual, but it is controlled by one political party, misnamed the Communist Party. As such, it cannot be reasonably argued that China is a traditional fascist state. However, political ideologies recycle and evolve. In this evolutionary process, fascism has taken on a new and more potent form of state control by a single political party without interfering the means of production. China and Iran are models of 21st century fascism. China’s version is secular, while Iran’s is driven by an irrational and radical Islamic fundamentalism. Of the two, Iran poses a greater immediate threat to peace. Unlike Iran, China is not deluded it has the backing of a vengeful God. Nevertheless, it is worrisome to see China develop into the world’s next superpower.

Sunset

August 16, 2008

In the evening I should say, ‘Thank God I have lived to see the sunset of this day!’

It’s not easy to be patient (The Financial Athlete #43)

August 16, 2008

A Meeting of Minds by Shue Tao
(story taken from Tri Thong Dang’s Beyond the Known, the Ultimate Goal of the Martial Arts)

A man was about to leave to take up an official post. A close friend came to see him off. “Remember when you become an official to always be patient.”

The man replied that he certainly would. His friend then repeated his good advice three times, and three times the man nodded in assent. When for the fourth time his friend repeated the counsel, the man became angry. “Do you take me for an idiot? Why do you repeat such a simple thing over and over again?”

His friend said, “See how it’s not easy to be patient? I have said that only a few times, and here you are already impatient!”

—————————————————————————-

Congratulations to Michael Phelps for winning 7 gold medals in the 2008 Summer Olympics…to date. His patience in swimming countless, lonely laps has paid off handsomely. Commercial endorsements will follow, and Phelps will never have to work another day in his life.

It is said, “Patience is a virtue.” More than a virtue, it is an increasingly rare quality. One which can create a life changing experience like Phelps’ in the 2008 Summer Olympics.

The most rewarding experience with investing in real estate or stocks is watching the valuation of them grow higher and higher and then years later selling at a windfall profit. This too can be a life changing experience. But the patience of holding is tested with set backs and slower than hoped for progress time and time again.

If I’m invested in a company which remains on track with my investment thesis, and the market price does not substantially exceed my estimated valuation, then I patiently hold. Oh, but it’s not easy to be patient!

Cheating and gamesmanship (The Financial Athlete #42)

August 15, 2008

In the 2008 Olympics at Beijing, China’s women’s gymnastics team performed the best and took the gold. Yet, the victory was tainted. Some of these girls are believed to have actually competed as young as 13, which violates the rule that gymnasts must be at least 16-years-old within the Olympic year. This rule was instituted to protect the health and welfare of children.

By the looks of these little girls and earlier reports on their actual ages, China is being accused of falsifying their birth documents. To the chagrin of the accusers, China is likely to get away with it.

A cheater deceives for the sake of winning or gain. They are everywhere…on Main Street and Wall Street. Although the vast majority of stock trades are legitimate on Wall Street, much illegal insider trading and naked shorting (selling shares that don’t exist) goes unpunished. Oftentimes, illegal trades cannot be prosecuted because of the loophole of offshore accounts executing the trades. (The SEC has no jurisdiction over offshore accounts.)

Less severe than cheating is gamesmanship defined by Merriam Webster as 1: the art or practice of winning games by questionable expedients without actually violating the rules; 2: the use of ethically dubious methods to gain an objective.

The object of gamesmanship in sports is to disturb the opponent mentally or break his flow such as by taunting and delay tactics. Its intent is to manipulate. Like it or not, gamesmanship is a part of competitive sports. It’s also very much a part of the stock market, whereby others try to influence you to buy or sell for their benefit, not yours. Athletes and investors should train themselves to be impervious to these tactics.
\
“Book smarts” can get you far in school, but it could give you a false sense of security with investing. To protect yourself against manipulators and cheaters, you need “street smarts,” which cannot learned by reading books. Best I can do to guide you is to advise: Never put blind faith on anyone, no matter how sincere, competent, or professional he seems. Always remain skeptical about people and numbers. Financial reports can be a work of fiction. Things often are not what they appear to be. To be safe limit a position to no more than 20% of your portfolio, and that aggressive 20% allocation would only be for something you feel extremely bullish about based on extensive due diligence and earned trust.