Archive for September, 2008

Emotional content (The Financial Athlete #53)

September 29, 2008

Love the ball wherever it moves
too far or too close
too high or too low
or exactly where you want it to go

Each point offers a fresh ball
Forget the balls of previous play
Only the ball for the point at hand matters

Listen to the ball and become one with it

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Stock market investors like to repeat the warning: “Never marry a stock!” This may convey the idea of attachment is deadly. While it’s true strong attachment to an asset has no benefit, it’s untrue to think all attachment is detrimental to performance. With attachment to a process absent, there can be no passion. Where there is no passion complacency fills the void. Where there is complacency poor performance abides.

Love the process of investing with the passion a child has for her favorite toys. Passion brings wonder. There is wonder in learning new skills and honing old skills. Passion for process breeds a youthful energy and enhances interest in both the “big picture” and the details. In time, you will be pleased to find your skills considerably developed.

Letter to U.S. Senators regarding Paulson’s bailout plan

September 25, 2008
  • First, Hank Paulson denied there was a huge, financial problem.
  • Then he said it was contained.
  • Now he says we need to act very quickly or suffer enormous consequences.
  • This so-called financial expert is dead wrong again, this time with a plan to benefit careless bankers at the cost of $700 billion to cash-strapped taxpayers.
  • Please do not approve the Paulson bailout plan! We cannot afford it without printing too much money. For a brief history on the dire consequences of printing too much money look at Zimbabwe of today or Germany in the 1920’s.
  • Paulson’s medicine is worse than the disease. Please take time to deliberate on this matter affecting generations of Americans and consider alternative plans, such as following the successful Swedish model explained here.
Sincerely,

Will America go bankrupt in 2012?

September 22, 2008

According to the Mayan calender the year 2012 will be a most ominous one. The world will change dramatically in 2012, more so than any other year in modern history including 1939, the year World War II began. Current economic events in only the last few days have led me to wonder: will one of the tumultuous events of 2012 be the US government going belly up? In other words, will it default on its Treasuries?

Within one week the US government has: 1) taken on about $700 billion of complex debt securities (pending Congress’s likely approval) which should be difficult to unwind; 2) granted FDIC insurance for up $100,000 per Money Market account; and 3) approved a change of status to bank holding companies for the largest investment banks –Goldman Sachs and Morgan Stanley. Unlike the preceding bailouts with Fannie Mae, Freddie Mac, and AIG where the US government gained nearly an 80% equity stake, the US government will take on much risk with zero equity in exchange for guarantees and removal of bad debt off the Balance Sheets of financial institutions. Gone is the development of a massive SWF (Sovereign Weath Fund) model which I had hoped Paulson had in mind. The idea here is government bailouts through the SWF should cost the shareholders, who should be content to trade 50-80% equity to save the corporation as an alternative to a 100% loss due to corporate bankruptcy.

While I agree the billions of dollars of bad debt has to removed from the Balance Sheets of financial institutions to put an end to the credit freeze, the scale of passing on the moral hazard on to taxpayers may be too unbearable even for the world’s economic superpower. Now some of you will say, “America won’t go bankrupt! It can print money to solve its debt crisis.” To that I would reply, “Remember Germany in the 1920’s.” Effectively, this would put America in a rut potentially worse than defaulting on its treasuries. America would not be the first to default on foreign debt. A few years ago Argentina defaulted on its foreign debt, and, incidentally, without disatrous results for itself.

Getting back to the business-as-usual scenario of today…the US government is on a life support system substantially financed by foreign investment, particularly US bonds purchased primarily from the non-allies of China, Russia, and Arab states in the Gulf region. These countries can pull the plug, but cannot afford to do so until their economies are less dependent on exports to a dwindling American market. So for the next few years its safe to say their good money will continue to chase bad money (US treasuries).

In times like these it’s best to prepare for the worst. How do that is another topic.

Hank Paulson saves the global economy

September 18, 2008

All of a sudden, the US government effectively owns the world’s largest SWF (Sovereign Wealth Fund) with a nearly 80% stake in mortgage finance companies, Fannie Mae and Freddie Mac, and for the world’s largest insurance company, AIG. In addition, the US government loaned $24 billion to JP Morgan to buyout a battered Bear Sterns.

Any private equity fund would drool over the terms for the AIG deal. The US government will be paid 11.5% interest on its $85 billion 2-year loan in addition to an equity stake nearing 80%, courtesy of AIG’s reckless management, whose bet on mortgage derivatives took on massive losses. There’s a very slim chance of AIG defaulting on this government loan. It’s problem was illiquidity, not insolvency. AIG has more than a trillion dollars of assets from which to sell and $78 billion in stockholder equity. More importantly to global stability, AIG is a major counter party for CDS (Credit Default Swaps) trades. CDS is an invisible giant of a market to the masses. It’s market size is an inconceivable $62 trillion. CDS are derivatives which bet on the default risk of debt. If a huge counter party like AIG fails to honor all its positions on trades, the mammoth market for CDS would implode.

Without a takeover of the GSEs (Government Sponsored Enterprises — Fannie Mae and Freddie Mac), housing would have fallen into a much deeper crisis and flush the global economy down the toilet with it.

The idea of GSEs was ill conceived to begin with. Two masters cannot be served…in this case, the masters being shareholders who want profits maximized and Congress with its political objective of more home ownership.

Socialization of capitalism was needed to stabilize the global economy. However, I suspect much of AIG’s assets will be sold back to the private sector. America at heart is a capitalist society and only turns to socialistic measures during desperate times. The question is…Will this massive US government intervention repeat the same mistake as its RTC (Resolution Trust Corp.), which bailed out the Savings and Loan industry in the late 1980s and early 1990s? RTC had cost taxpayers billions with its bulk sales of assets, which essentially subsidized real estate investors.

I doubt the federal government will be so stupid this time to sell its newfound, enviable assets at fire sale prices. U.S. Treasurer Hank Paulson, who is the former Chairman of Goldman Sachs, is shifting the thinking in Washington from bailout at taxpayers’ tremendous loss to development of a shrewd SWF (Sovereign Wealth Fund), which only a topnotch Investment Banker can inspire.*

The irony of it all is the US government enriched itself with these acquisitions (or confiscations?) because it had lacked oversight to regulate an anything goes capitalism which got us into this fine mess.

These are truly historic times.

*Read my comment for an updated opinion

Lifting too much weight (The Financial Athlete #52)

September 14, 2008

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.

factcheck.org

September 13, 2008

Go to factcheck.org to separate the facts from the spin in this Presidential election. Factcheck.org cites its reliable sources.

What next? (The Financial Athlete #51)

September 11, 2008

In the Fall of 2003 I took a memorable short vacation to San Juan, Puerto Rico. The hotel’s concierge arranged for a tour guide to drive us on a day trip to the tropical rain forest of El Yunque National Forest and the famous Luquillo Beach. The guide was a rather large man, amicable and loved to chat beyond the usual prearranged monologue of historical facts. After an interesting conversation, he bellowed a question I hate to hear from strangers, especially when asked within 5 minutes of meeting them: “What do you do?” You get all sorts of undesirable reactions from looks of envy to requests for stock tips if you reply, “I’m an investor,” so normally I don’t. But this tour guide had a way with people to get them to open up and I was no exception. He was neither curious or envious with my profession, but he did have a story to tell.

He pinched his chin and began, “Not too long ago I took a business executive in his 60’s on a tour of the island with his wife. He told me he was stressed from work and wishes everyday he could retire. Being a bit nosy, I said to him, ‘You’re a business executive. Don’t you have enough to retire?’ The executive replied honestly, ‘No. my net worth is only $3 million. I need at least $5 million to retire comfortably to maintain my lifestyle.’ The calm voice of the tour guide suddenly became emotionally charged, one hand of his danced around and for our safety the other held onto the steering wheel. “Only $3 million! I couldn’t believe my ears! And to think in Puerto Rico many are struggling to make a few bucks.”

I nodded my head in agreement. “What did you say to him?”

The guide preached, “SIMPLIFY! SIMPLIFY YOUR LIFE.” He then paused as though I should digest this message before continuing, “But this was not an option for my ambitious and unhappy friend to consider. He would rather go on with his stressful life to make a couple million more. And if his net worth were to expand to $5 million, no doubt he will probably then say to himself, ‘Oh, $5 million is not enough. I need $10 million before I retire to maintain my lifestyle.'”

“How should a discontented, rich man live a simple life? Should he sit on a hammock at the beach all day?” I said with a smile.

The tour guide had a ready reply. His fingers touched his chest over the heart and said, “Go inward. Become a sage.”

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Many of us have fixed ideas of who we are, mostly defined by what we do. This is not altogether a misguided notion. What we do largely shapes us into who we are. The problem lies in defining ourselves too narrowly. Outside the confines of what we do, many of us feel like the proverbial fish out of water.

When the inevitable time comes for an elite athlete to retire he struggles to adjust to life outside of the competitive sport he dearly loves. For him retiring must feel like Cinderella hearing the clock strike midnight while dancing with the prince at the formal ball. Usually it is not long before news breaks of his coming out of retirement to play the sport he elevated to a new level. His return is initially welcomed by fans who are later disappointed to witness their hero’s performance descend from superhuman to mere average for a professional athlete. He may rekindle some moments of his glorious past, as his diminished physical ability may be somewhat compensated by greater knowledge of the game than his younger peers possess and by an undiminished love and deeper appreciation for the game.

Although an athlete eventually will come to reconcile his new role outside of competitive sports, he doesn’t have to settle for a sedentary lifestyle. He should remain active throughout his life. Physically active old-timers like Jack Lalaine are my biggest role models in sports. In the investing world, I feel the same way about decades long investors like Warren Buffet and T. Boone Pickens. At age 80 T. Boone Pickens aims to transform the energy landscape in America.

These elderly folks are sages in their own right, showing rather than telling us to keep active and do what you love for your whole life.

(Photo above: a hammock at a beach in Bora, Bora in Tahiti)

McCain/Palin will lose the election

September 4, 2008

In choosing Palin as his Vice Presidential Candidate, McCain swung for the fences. To have a real chance of winning the election against an opponent with the magnetism of John F. Kennedy he had to. Electing a V.P. Candidate from the good ole boy network would have doomed him to failure. McCain was right to align himself with a popular figure outside the Washington beltway. Somebody ordinary people can relate to. A fighter. A maverick. A leader who can reach across party lines. Palin was billed to embody all these admirable traits. Unfortunately, her speech at the Republican Convention revealed an ailin’ Palin whom independent minded voters cannot identify with.

To her credit Palin succeeded in positioning herself as a fighter and a straight talker who can relate to ordinary people in rural America. And she energized the conservative base, but in doing so alienated the critically needed independently minded voters, who are looking for conciliatory leadership.

Palin speech epitomized the black and white world view of George W. Bush. Smoothing music to the ears of the neocons and social conservative base, but the sound of scratching a chalk board to those who come from the middle. Instead of advocating America to be the world leader of alternative energy, she placed too much importance on the need for America to drill more oil. Instead of reaching out to protect the working class including equal educational opportunity for their children with school vouchers, she reached out to Corporate America to protect their profits. Instead of praising Obama for his work as a community organizer and linking herself on the same grassroots level as mayor of a small town, she squandered this opportunity by insulting the noble efforts of community organizers.

The winner of this election will be the one who appeals most to the middle. Time and time again Obama wisely speaks about unifying this nation. As the 44th President of the United States, he will be given that chance.

R.I.P. The McCain/Palin ticket

Go deep but never too deep (The Financial Athlete #50)

September 2, 2008

One of my life’s cherished memories is diving 80 feet below the surface in a Hawaiian coral reef teaming with a rainbow of colors in tropical fish. This dive was my reward for getting certified by PADI with practice in the frigid waters (I hate cold!) of Monterey Bay in California. In this same trip to Hawaii, I went snorkeling too, but this experience was no where near as dramatic as the diving expedition in the reef, where I felt immersed in another planet.

With investing I also like to go deeper than the shallow waters but not too deep. I concentrate my portfolio with a carefully chosen 10 to 20 stocks rather than cast a wider net and diversify with dozens or hundreds of stocks. For me, wide diversification is like snorkeling, only a step better than the passive experience of watching fish on TV. Snorkeling may be a bit safer than diving, but far less satisfying. Going deep enhances my learning. I get involved with the companies I invest in, calling Investor Relations and Management of small to mid size corporations, following the industry and company news and SEC filings, and discussing the company performance with other investors. No one has the time to do this deeply for hundreds of companies.

While I like to invest deeply, I’ve learned to be cautious to not invest too deeply with more than 20% of my portfolio in any single equity. Investing too deeply in a single investment is like diving too deep in water. Pressure doubles for each 33 feet under water. If a diver dives too deep he will implode. The same can happen to your portfolio if it’s too concentrated.

(Photo above: Professional diver Mehgan Heaney-Grier dives to her first 155-foot record. Do not try this at your home port or any other body of water.)

An introduction (The Financial Athlete)

September 1, 2008

Learning a profound principle on an intellectual level, although appreciated and understood, often is not internalized. How then can we internalize a principle? We can internalize it through intense emotional content, but emotions such as anger and distress are too high a price to pay.

Fortunately, it is not necessary to suffer to internalize a principle in the mind. A principle can be learned first kinetically (through movement of the body). To learn kinetically, the body internalizes a principle more readily than when the principle is introduced directly to the mind. When the body learns a principle, it is always from direct experience. Whereas when the mind is told the same by written word or a verbal message, the experience is indirect. Direct experiences are much easier to internalize than indirect experiences.

Now because the body and mind are integrated, relevant principles the body learned and internalized from the movement of the body becomes internalized in the mind without great effort or anguish. These internalized principles are transferable to other activities of the mind such as investing.

This book compiles lessons and principles I have learned from movement of the body in martial arts, yoga, tennis, and other sports and applied to investing and life itself. It is a journal of my inward journey of investing. The content of this book is not intended as investment advise. Use this book as a reference. Take what is useful and meaningful to you. Review what seems useless at a later time.

This journey began with two questions. The first question is…What is investing? Obviously, the purpose of investing is to produce a return. Most of us associate investing entirely with money, but people invest more than just money. Time, energy, and knowledge are also invested for both quantitative and qualitative returns. We all know money by itself yields an awful return on investing in relationships and health. In wanting the best for our children, we nurture them with love and education. In wanting health, we eat nutritious meals and exercise regularly. In wanting intimacy, we share ourselves deeply. In this broad sense, all of us are investors.

The second question is…Why invest? To invest just to become extremely rich financially is to focus on the finger pointing at the sky and not the glorious sky. It is a game of showmanship which says to the world, “Look at what I have amassed!” Instead, invest to live a full life free from worry of money and for personal growth and self-discovery and for the sheer fun of it.